Landlords have been subject to a number of significant tax changes in recent times, including restrictions in the allowability of finance costs for tax purposes, which are being phased in between 2017/18 and 2020/21.
With this in mind, many are contemplating the potential advantages of furnished holiday lettings (FHLs). Here we outline some key areas to consider.
Meeting the conditions
A number of conditions apply to FHLs, some of which are outlined below. To qualify as an FHL, a property must be situated in the UK or elsewhere in the European Economic Area (EEA). Where there are properties in the UK and the EEA, they are to be treated as two separate property businesses with parallel provisions.
Accommodation is ‘furnished’ if the visitor is entitled to the use of the furniture. There should be sufficient furniture provided for normal occupation.
The business must be carried on commercially, i.e. let on a commercial basis and with a view to making a profit. Close season lettings may produce no profit but normally help towards the cost of maintaining the property. This letting can still be treated as commercial. On the other hand, lettings to friends or relatives at zero or nominal rents are not commercial.
An FHL property must also meet the qualifying tests:
- Availability: the property must be available for commercial letting as holiday accommodation to members of the public for at least 210 days during the relevant period;
- Letting: the property must be commercially let as holiday accommodation to members of the public for at least 105 days during the relevant period. A letting to the same person for longer than 31 continuous days (a ‘period of longer term occupation’) is not a letting as holiday accommodation for the purposes of this condition; and
- Pattern of occupation: total periods of longer term occupation must not exceed 155 days during the relevant period.
Some advantages of FHLs
The FHL market does offer some key tax advantages. Under the FHL rules, items such as furniture, equipment and fixtures will be covered by capital allowances as plant and machinery. This is in contrast with the buy-to-let market, where capital expenditure is not allowable for tax.
In addition, profits from an FHL business can count as relevant UK earnings when calculating relief for pensions purposes. Losses from an FHL business may only be carried forward against future profits from the same business, so profits and losses from a UK and an EEA FHL must be calculated separately.
HMRC treats FHLs as a trade, rather than an investment. This means capital gains tax (CGT) reliefs such as business asset roll-over relief and Entrepreneurs’ Relief can be claimed, and it may be possible to get relief on gifts of business assets and relief for loans to traders. There is no restriction on the deductibility of mortgage interest incurred in relation to the FHL business.
Business Property Relief (BPR)
BPR is a key inheritance tax relief for businesses, and can potentially reduce the taxable value of a transfer of relevant business property by 50% or 100%, depending on the type of property involved. In some circumstances, FHLs can provide access to BPR, although to qualify it is necessary to provide a substantial level of services in addition to the holiday accommodation.
We can advise on all areas of tax and property. Please contact us for advice that is tailored to your individual circumstances.