The UK tax treatment of Furnished Holiday Lettings (FHL) has been advantageous for many years. FHL are treated as a trade for certain purposes, provided conditions are met. The regime can often be preferable when compared to the tax position for normal property lettings, in particular for an individual’s income tax and capital gains tax purposes. Further, as profits from FHL count as earnings on which pension contributions can be based, this can be a useful addition to a buy to let property portfolio which otherwise only generates investment income.
Qualifying
The favourable tax regime for furnished holiday letting accommodation includes qualifying property located anywhere in the European Economic Area (EEA). In order to qualify for FHL treatment certain conditions have to be met. These include the property being available for letting for at least 210 days in each tax year and being actually let for 105 days. Provided that there is a genuine intention to meet the actual letting requirement it will be possible to make an election to keep the property as qualifying for up to two years even though the condition may not be satisfied in those years. This will be particularly important to preserve the special CGT treatment of any gain as qualifying for the lower CGT rate of 10% where the conditions for Entrepreneurs' Relief are satisfied.
Losses arising in an FHL business cannot be set against other income of the taxpayer. Separate claims would need to be made for UK losses and EEA losses. Each can only be offset against profits of the same or future years in each relevant sector.
Tax breaks
The FHL market offers some important tax advantages. The finance cost restriction, for instance, does not apply to landlords of FHLs.
Items such as furniture, equipment and fixtures will be covered by capital allowances as plant and machinery. This is another contrast with the buy to let market, where capital expenditure is not allowable for tax, although there may be relief when certain items are replaced. Pension planning is another plus point, as profits from an FHL business can count as earnings for pensions purposes. The tax treatment of losses can also be advantageous.
As FHLs are treated as a trade, rather than an investment, it means capital gains tax reliefs such as Business Asset Rollover Relief and Entrepreneurs’ Relief can be claimed. It may also be possible to get relief on gifts of business assets and relief for loans to traders.
But what about one key inheritance tax break for owners of businesses - business property relief (BPR)? BPR is an inheritance tax relief which can help with succession planning, potentially reducing 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 succeeding with a claim for BPR may be difficult. To qualify, it is necessary to provide a substantial level of service in addition to the holiday accommodation. A case where a taxpayer recently won the claim shows how high the hurdle can be.
In this case, holiday accommodation in four units in and adjoining the owners’ house in the Scilly Isles was provided. Guests could make use of the croquet lawn, relax in ‘exceptionally well designed’ gardens, or take advantage of a games room, sauna, laundry, swimming pool, golf buggy and bicycles. They were invited to use herbs from the garden to cook with, or take tomatoes from the greenhouse. There wasn’t just a barbecue area – the owner would organise barbecues for the visitors. There wasn’t just a welcome pack on arrival – the owner would regularly go shopping for crab and fresh fish for guests.
The judge commented that it was the ‘personal care lavished upon guests’ which distinguished it from the majority of FHLs. It was, tribunal said, comparable to a ‘family run hotel’.
How we can help
Clearly there are many advantages but also some disadvantages associated with FHLs. It is vital to keep an eye on the detailed rules in order to continue to access the tax advantages of FHL status.
We would be happy to review your property portfolio with you to make sure that your affairs are structured efficiently. Contact us for a free initial meeting, without obligation.