UK: Furnished Holiday Lettings

Last Updated: 19 February 2013
Article by Smith & Williamson


Furnished Holiday Lets (FHLs) are once more in the news with the Pawson case heard in the Upper Tribunal where the Judge has decided that a furnished holiday let was not eligible for business property relief (BPR) which would have reduced inheritance tax by 100% on the value of the FHL property.

Despite the uncertainty on BPR, individuals or companies that run a qualifying furnished holiday let business can benefit from a number of other tax breaks. FHLs may be in either the UK or the EEA, but FHLs in the UK will be treated as comprising a different business to FHLs in the EEA.

The conditions for furnished holiday lets

  • The business must be carried on a commercial basis with a view to profit.
  • The property must be provided fully furnished.
  • It must be let for at least 105 days each year.
  • It must be available for letting for at least 210 days each year.
  • Lettings must comprise short term lettings of no more than 31 days.
  • The property can be let out for periods longer than 31 days in one stretch but none of the days will count towards qualification. However if the total of all or any 'longer term occupation' lets is more than 155 days in the year, the property will no longer qualify as a furnished holiday letting.

For this purpose the relevant year is usually the tax year, but will be the first 12 months from the date of first letting and the final 12 months to the end of the final letting.

Where more than one FHL is owned, the let day requirement can be averaged between the different properties in the UK. A separate averaging election can be made for the EEA properties.

Where the let day limit of 105 days is not reached in a year and every effort has been made to meet it, the owner can elect for a year's grace. The second of two consecutive years can also be elected for but only if an election was made for the first year.

This period of grace must follow a qualifying period.

Business Property Relief from Inheritance Tax

At the time that the FHL legislation was introduced in 1984, HMRC accepted that FHLs qualified for business property relief "BPR" on actively managed holiday lets. Following legal advice received by HMRC in 2008, it reversed its opinion and advised that BPR would generally be refused.

The key test case concerned a FHL owned by Mrs Pawson, and was heard by the Upper Tribunal in December 2012; the Upper Tribunal reversed the decision of the First Tier Tribunal and refused BPR. It is anticipated that the case will go to the Court of Appeal, but currently HMRC is unlikely to allow BPR on holiday lets. Clearly there are some that are almost hotels where HMRC may be swayed but you should not count on BPR, either on FHLs held at death or on lifetime gifts of FHLs that become chargeable.

Advantages of the Furnished Holiday Lettings regime

There are a number of tax advantages in having a qualifying FHL:

  • Capital allowances can be claimed rather than the usually less generous "wear and tear" allowance. Capital allowances can be claimed not just on the furnishings, but also on integral features incorporated in the building, such as wiring and plumbing.
  • FHL profits are relevant income for pension purposes.
  • Entrepreneurs' relief may be available on the sale of the business, reducing capital gains tax from 18% or 28% to just 10%.
  • FHLs can be gifted and the gain held over.
  • The gain on the sale of a FHL can be held over into the purchase of another qualifying asset, not necessarily a FHL, and vice versa.

And some disadvantages

  • Losses on FHL businesses can only be offset against future income from the same business. For example, a FHL property might generate losses, cease to qualify and be kept as a rental property but the earlier FHL losses would not be available against the subsequent rental profits.
  • The losses of an EEA FHL business and a UK FHL business cannot be set-off against each other, even in the same year.
  • VAT must be charged if the registration limit (currently Ł77,000) is exceeded. This includes all business income earned by the same person, so farmers and consultants might find they need to charge VAT even though their FHL income was well below the limit.

Planning points

Where property is owned with a spouse, profits and losses can be split as agreed between the parties, rather than needing to be split 50/50.

It may be possible to claim capital allowances on a property purchased for use as a FHL. Specialist valuers have indicated that typically, somewhere between 12% and 30% of the purchase price of a property (excluding land value) could be treated as qualifying plant and machinery, depending on the property specification.

Interest relief may be available against FHL profits on loans secured on a main residence and used to buy the property.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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