The notorious changes to mortgage interest claims for buy-to-let landlords resulted in a huge interest in Furnished Holiday Lets, given their more favourable tax treatments, and especially given they are not affected by the finance cost restrictions.
Here at RITA, we are seeing more and more clients either purchasing a property with a view to operating it as a Furnished Holiday Let, or, converting their existing property to this type of activity. We are also working closely with the South West Airbnb management company Guesthoo, providing property tax services to many of their clients. This feature is a general overview of the tax treatment of Furnished Holiday Lets, as an unincorporated business.
HM Revenue and Customs’ Furnished Holiday Letting (FHL) rules have been around for many years, ever since their introduction in the Finance Act 1984. Whilst there have of course been various tweaks over the years, it is good news the rules are still in existence, as the Labour Party nearly abolished these during their reign. The most significant changes in the past have been to loss relief rules and the qualification tests, but this feature will explore the rules as they currently stand.
Furnished Holiday Lets differ to conventional buy to let property, with a number of special rules attracting a host of tax differences, along with not being exposed to the mortgage interest restrictions.
The first challenge is ensuring your property qualifies as a Furnished Holiday Let.
There are 3 considerations, and all 3 must be satisfied. We summarise each of these below:
Conditions 1, 2 and 3 below must be met, to ensure classification of being a Furnished Holiday Let:
1.) The availability condition: For at least 210 days the property must be available for commercial letting.
2.) The letting condition: For at least 105 days, the property must be actually commercially let.
3.) Pattern of occupation: the property cannot be let for periods of more than 155 days of longer-term accommodation during the year. The term “longer term accommodation” means a period of time that is greater than 31 days. Although bear in mind, HMRC may accept exceptional circumstances, such as if the tenant fell seriously ill.
Care must be taken if the Furnished Holiday Let activity has just commenced or at cessation. Should you be considering the first period of the property being let to tenants, then it is the first 12 months which is the consideration period. However, on the flip side, at cessation of your FHL business, then it is the last 12 months which is the consideration period.
The property must be commercially let in the UK or EEA. Note the choice of word “commercial;” although you do not need a formal lease, you are unable to classify free or reduced rate usage of the property by family and friends as a commercial let! In essence, the word commercial is meaning therefore that you need to be operating with a view to be making a profit. That being said, you could still use the property for private use, as long as the conditions in Consideration 1 are met.
And finally, as obvious as it may seem, you have to ensure the Furnished Holiday Let property is furnished ensuring the tenant enjoys normal occupation.
Once you have reviewed the three considerations above, and have confirmed your property does actually qualify as a Furnished Holiday Let, then you must follow the FHL rules and you are unable to elect for the property to be taxed in the same way as a standard buy to let property is taxed.
Operating a Furnished Holiday Let attracts a host of tax benefits, including but not limited to:
- Furnished Holiday Lets are not exposed to the mortgage interest restrictions affecting conventional buy-to-let landlords. Therefore, those operating FHLs are still allowed to claim for mortgage interest as a business expense.
- Rollover relief, which allows you to defer Capital Gains Tax on disposal of the property, on the assumption that the proceeds are reinvested into another qualifying business. Please note however, should that property fail qualification in a period, then the rolled over gain would be restricted.
- On the assumption the property sale is classed as a business disposal, then you may be eligible for Business Asset Disposal Relief. This gives a reduction in capital gains tax, attracting a lower rate of 10%. It should be noted however that to benefit from this, the disposal cannot be the sale of one business asset, but must constitute whole or part of a business. In addition, there may be restrictions if there is “other” use of the Furnished Holiday Let. This is a complex area and advice is strongly recommended here.
- In operating a Furnished Holiday Let, unlike conventional BTL, landlords may be able to claim for items such as fittings, fixtures, white goods, furniture and integral features. This is a complicated area relating to capital allowances and annual investment allowances, but keep your receipts and be sure to pass everything across your tax adviser to ensure all claims are made on your tax return.
- When compared to standard income from property, there is greater flexibility as to how profits may be split between spouses.
It is worth noting with regards losses arising on a Furnished Holiday Let, that these may be offset against other Furnished Holiday Lets you operate. Although bear in mind that losses from a UK Furnished Holiday Let, may not be offset against losses from an EEA Furnished Holiday Let, and vice versa. You also cannot offset losses against standard buy to let profits, nor any other income reported on your self assessment tax return. Of course, if the loss is unused, it may be carried forward for future use.
Problems can arise if you struggle to meet the Furnished Holiday Let conditions. If you fail to meet the aforementioned conditions, then your property will revert back to standard BTL tax rules, as opposed to the Furnished Holiday Let rules. Therefore, you will need to exercise caution in certain areas, such as if you have claimed capital allowances in the past. This being the case, a damaging balancing charge may arise. Careful planning is therefore of utmost importance.
On the assumption that you wish to retain the Furnished Holiday Let status, then the good news is that there is a couple of elections which may help you keep this:
Election 1 – This election is named “Period of Grace.” If it was your genuine intention to meet the 3 conditions highlighted above, and passed all conditions other than the actual occupation condition, then you may make an election to be treated as a Furnished Holiday Let for another year. Then in the next year, should you still fail the tests, but an election has been made, then your property should still be treated as a Furnished Holiday Let. However it is from that point on, that if you still fail to meet the criteria, then you will revert back to standard buy to let rules. This being the case, you must still have the ability to prove your intention was to meet the criteria. As such, it is essential that your Furnished Holiday Let was available to let for the minimum designated days as set out in the criteria above. Of course, this election is available for those who have a property which has qualified as an FHL in at least one year prior.
Election 2 – The second election is named “Averaging,” and is for those who have more than one Furnished Holiday Let. The averaging election allows you to average your letting days of some or all of your properties to help you reach the 105 day threshold set out in the criteria above. It is important to note however, that you cannot mix UK Furnished Holiday Lets with EEA Furnished Holiday Lets for the averaging election. In addition, note that there is a time limit for making such a claim; you have one year from 31 January following the end of the tax year.
This is a complex area; this feature touches on the basics of Furnished Holiday Lets, and it is always highly recommended to seek advice, especially when getting into more advanced areas such as IHT, stamp duty and VAT, the latter given Furnished Holiday Let income is standard rated for VAT purposes.
For any of your property tax needs, please do not hesitate to contact RITA4Rent on Freephone 0800 1 22 33 57 or by clicking here.