Furnished Holiday Lets (FHLs) continue to be popular, whether properties used part of the time by the family or properties run solely for a commercial return.
Individuals or companies that run a qualifying FHL 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 from those in the EEA.
The current conditions for furnished holiday lets:
- the business must be carried on a commercial basis with a view to profit;
- the property must be provided furnished;
- it must be let for at least 105 days and
- it must be available for letting for at least 210 days each year;
- individual lettings lasting longer than 31 days will not count towards the 105 and 210 day limits and such longer lettings must not exceed 155 days in total.
- 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 election is needed 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.
FHLs usually do not qualify for Business Property Relief from Inheritance Tax but in exceptional circumstances, where substantial services are provided by the proprietors, they may qualify.
Advantages of the Furnished Holiday Lettings regime compared to furnished lettings
- interest on loans to buy or improve the property are tax deductible in full and not subject to the rules restricting interest deductions to the basic rate;
- 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 rolled over into the purchase of another qualifying asset, not necessarily a FHL, and vice versa; and
- the small business discount for business rates may apply. Business rates apply if the property is available for holiday letting for at least 140 days per year.
- losses on FHL businesses can only be offset against future income from the same business;
- the losses of an EEA FHL business and a UK FHL business cannot be set-off against each other, even in the same year;
- the additional 3% SDLT will be due on purchase except in the unusual situation where the purchaser and spouse or civil partner have no chargeable interest in other residential property; and
- VAT must be charged on rental income if the registration limit (currently £85,000 in the UK) is exceeded. This includes all business income earned by the same person Those with FHLs in EEA countries will need to consider local VAT rules.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of publication.