UK: Furnished Holiday Lettings - September 2015

Last Updated: 9 September 2015
Article by Smith & Williamson


Furnished Holiday Lets (FHLs) continue to be popular, either properties used part of the time by the family or properties run solely for a commercial return.

Individuals or companies that run a qualifying furnished holiday let business can benefit from a number of tax breaks.  FHLs may be located in either the UK or the EEA, but FHLs in the UK will be treated as comprising a different FHL business to those 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 the 105 and 210 day lettings qualifications.  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 the purpose of determining qualification, the relevant year for unincorporated businesses is usually the tax year (the period of 12 months ending with the last day of the accounting period for companies), 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 105 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.

A case concerning a FHL owned by Mrs Pawson was heard by the Upper Tribunal in December 2012; the Upper Tribunal reversed the decision of the First-tier Tribunal and refused BPR.  A similar case (Green v HMRC) was heard by the First-tier Tribunal in 2015 and this also failed.   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 chargeable lifetime gifts of FHLs.

Advantages of the Furnished Holiday Lettings regime compared to furnished Lettings

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;
  • 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 net FHL income will be relevant income for pension purposes;
  • 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;
  • the property may qualify for business rates and the small business discount.  The net amount may well be less than council tax or indeed, there may be no charge at all after the small business discount.  Business rates apply if the property is available for holiday letting for at least 140 days per year.
  • There will be no restriction to basic rate tax relief for interest costs of a FHL business, when the new measures are introduced from April 2017.

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 strictly 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;
  • although only available to furnished lettings businesses until 31 March or 5 April 2016, the 10% wear and tear charge is not available and it may be more advantageous than capital allowances in some circumstances;
  • VAT must be charged if the registration limit (currently Ł82,000 in the UK) is exceeded.   This includes all business income earned by the same person, so farmers and consultants for example might find they need to charge VAT even though their FHL income was well below the limit.  For VAT purposes holiday letting activity is usually treated as supplied in the territory where the property is located.  Those with FHLs in EEA countries will need to consider local VAT rules.

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 the integral features in 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.

We have taken care to ensure the accuracy of this publication, which is based on material in the public domain at the time of issue. However, the publication is written in general terms for information purposes only and in no way constitutes specific advice. You are strongly recommended to seek specific advice before taking any action in relation to the matters referred to in this publication. No responsibility can be taken for any errors contained in the publication or for any loss arising from action taken or refrained from on the basis of this publication or its contents. © Smith & Williamson Holdings Limited 2015.

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