With more and more people opting for a “staycation” rather than venturing abroad for a holiday there is a growing popularity for furnished holiday accommodation in the UK.
For the owners of properties which qualify as furnished holiday accommodation, not only is there the attraction of a potentially lucrative income source, there are also various tax benefits to be gained.
What qualifies as a Furnished Holiday Let (FHL)?
To qualify as a FHL your property must be in the UK or in the European Economic Area (EEA). The property must be furnished sufficiently for occupation and the guests must have use of the furniture during their stay. The property must also be let with a view to making a profit i.e. on a commercial basis.
The accommodation must also pass three occupancy conditions:
- Availability condition The property must be available as a FHL to the general public for 210 days in the relevant 12 month period (usually a tax year). This must exclude any days during which the property is occupied by the owner.
- Letting condition The property must actually let out as FHL accommodation for at least 105 days during the relevant 12 month period.
- Pattern of occupation Any periods of occupation which are classed as ‘longer term occupation’ will not count towards the actual occupation condition. Periods of longer term occupation are those which last between 31 and 155 consecutive days. If the total of all or any longer term occupation lettings is more than 155 days in a tax year, the property will not qualify as a furnished holiday let for that period. There are exceptions to this rule where the period of occupation exceeds 31 days due to exceptional circumstances.
What if all three occupancy conditions are not met? All is not lost if the letting condition is not met because there is the option to make an averaging election if more than one property is let, provided all of the properties meet the availability and pattern of occupation conditions. The election averages the occupancy for all the qualifying FHL properties. Equally, if there is a genuine intention to let the property and the letting condition was met in the previous year, a period of grace election can be made. This will remain for the following year if the condition is still not achieved but the property will cease to qualify in the third consecutive year where the letting condition is not achieved.
What are the tax benefits?
- Profits from a FHL are treated as earned income, as a result of this these profits are classed as relevant earnings for pension contributions. Profits arising from normal letting activities are not.
- Capital allowances can also be claimed on qualifying capital expenditure relating to the FHL such as furniture and white goods, including integral features. Capital allowances are not available on expenditure incurred in relation to residential let properties.
- FHLs qualify for certain capital gains tax reliefs. These reliefs include rollover relief, gift relief and entrepreneurs’ relief.
- Full tax relief is available for finance costs incurred in relation to a FHL, unlike residential let properties which now face a restriction on the finance costs which can be deducted. Other points to note:
• Whilst treated as a business asset for capital gains tax purposes, it is unlikely this will be the case for inheritance tax purposes, unless there is an exceptionally high level of servicing. Therefore a FHL would not automatically qualify for business property relief (BPR), although the Pawson (2013) and Ross (2017) cases had found not enough services were provided to justify trading for BPR purposes. The latest 2018 case of Executors of Joyce Graham (Deceased) v HMRC qualified but only with an exceptional level of services provided with more than 50% of the owners time and more than 50% of income relating to services as opposed to providing property.
- The provision of holiday accommodation is a taxable supply therefore if income from a FHL exceeds the VAT registration threshold, the owner must register for VAT and charge VAT on the rental income.
- Losses arising from a FHL are restricted in how they can be utilised. The losses can only be used against future profits arising from the FHL and cannot be offset against other income.
For further advice regarding furnished holiday let accommodation please get in touch with your usual Baldwins contact.