A Brief Guide To Furnished Holiday Lettings
There are both advantages and disadvantages ...
For tax purposes, property rental businesses are generally treated as an investment and not a trade. Therefore many of the valuable tax reliefs available to trades are not available ...
There are both advantages and disadvantages to owning furnished holiday lettings!
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A Furnished Holiday Let (FHL) is an exception to this rule. If a property meets the requirements to be an FHL, it will qualify for some of the tax advantages usually reserved for trading businesses.
The property can be a cottage, flat, house or caravan so long as it meets the specific conditions. So what are these conditions? To qualify as an FHL a property must satisfy the following:
Location: The property must be within the European Economic Area, which primarily is made up of the UK and EU member states.
Furnishings: The property must be furnished. There is no guidance on what level of furnishings are required, but if you aim for what you would expect from self-catering accommodation, you are not going to go far wrong.
Profitability: The property must be let on a commercial basis with a view to making a profit. Whilst losses may be anticipated in the early years of ownership it must be shown that in the future you intend to make a profit from the letting.
Occupation: During a 12 month period, usually a tax year, the property needs to be:
available for let for 210 days
be let as a holiday let for 105 days
longer-term occupation is defined as a letting of more than 31 days, but not longer than 155. The property can be let for periods longer than 31 days at one time, but none of the days will count towards the letting condition (unless there are exceptional circumstances).
It may not always be possible to qualify as an FHL every year, so the legislation allows for a property to continue to be treated as an FHL, once it has been an FHL, even if it fails to meet the actual occupation condition for two consecutive years.
So what are the benefits?
Profits from an FHL are included within relevant earnings for pension purposes.
Capital allowances can be claimed in respect of capital expenditure incurred on an FHL
Capital Gains Tax reliefs are generally only available to trading businesses, but can be claimed if an FHL business is sold. These include:
Where FHL's are owned jointly by a husband and wife profits and losses can be allocated in whatever share is agreed as a Profit Split.
What are the disadvantages?
If your turnover exceeds the VAT registration threshold, you will need to charge VAT on the rents. Not only is this an administrative issue, it may make the property uncompetitive.
A loss incurred on an FHL business in any tax year is not available for set off against any other income or gains.
Unlike trading businesses, most FHL businesses will not qualify for Business Property Relief (BPR). So the full value of the FHL, less any mortgage, will be within your estate for Inheritance Tax.
The reliefs available for FHLs can be very attractive, but the conditions can be difficult to satisfy. As always professional advice should be sought before making any financial decisions.
"Would you like to know more?"
If you're thinking of offering furnished holiday lettings and want to be sure of your tax position, do call me on 0333 335 0427 or click here to ping me an email and let's see how I can help you.
Until next time ...
Helen brings the personal tax planning experience of the top 20 tax companies to Essendon. Formerly of MacIntyre Hudson (with 45 offices nationwide), Helen worked at Chancery for more than 10 years before joining Essendon as the personal tax specialist.
Tax Planning can make a considerable difference to your tax liability. Helen’s specialist knowledge in tax planning and experience ensures every opportunity to minimise your tax bill is utilised. By analysing your investments, income, profit and expenditures, Helen will provide strategic tax planning expertise that could offer significant savings, whilst delivering clear, honest advice and guidance.
When Helen is not at Essendon she spends time with her young son and likes going on long walks with the family dog.