Properties that are let furnished as holiday accommodation benefit from a range of tax reliefs which are not available to other types of property letting. Proposals have previously been made to withdraw many of the reliefs, but they have survived through successive governments. Some changes have been made in various respects however.
With holiday accommodation, one normally envisages the letting of a cottage in a well-known holiday area or at a seaside town but in fact the reliefs have no such limitation. All that is required is the letting of a furnished property, subject to requirements concerning the period of lettings (as explained further below). The particular location of the property is not relevant for tax purposes. It may therefore be in an inner city area or any other location not normally considered for holiday purposes.
The tax reliefs now apply to properties satisfying the letting conditions in the European Economic Area, whereas at one time the reliefs were limited to UK properties.
In very broad terms, furnished holiday accommodation is treated for most tax purposes as a trading venture with the result that the various tax reliefs available to traders are also made available to those letting the holiday accommodation. However, this does not apply in every respect and a summary of the special provisions in relation to income tax, capital gains tax and inheritance tax is set out below.
For accommodation newly let as furnished holiday accommodation in the current fiscal year, the rules are that the property must be available for commercial letting to the public generally for at least 210 days in a 12-month period and it must actually be let for at least 105 days in that period. It will normally be fairly easy to comply with the 210 day requirement as a property will generally be regarded as available for letting on a commercial basis to the public whenever it is not being occupied by family members. The 105 day test is a little more stringent as it requires actual letting for fifteen weeks in the year. Although any property which is advertised and marketed as holiday accommodation can be expected to be occupied by holidaymakers for more than that period of time in a 12-month period, it may be more difficult for a property which is not marketed in any way to reach that level of occupation.
There are requirements about longer term occupants of the property. These are those who occupy for more than 31 consecutive days and as a general rule it will be inadvisable to have persons occupying on this basis, as they may prejudice the availability of tax reliefs.
The 210 and 105 day tests must be satisfied in a 12-month period. Where a property is first let, the 12-month period runs from the date of such first letting. Otherwise the 12-month period will normally be the fiscal year.
Furnished holiday lets are treated as a trade for income tax purposes and accounts should therefore be drawn up in the same way as for any other trading business. A significant advantage is that capital allowances can be claimed for all the equipment which is purchased for use in the property. These will be given under the heading of ‘Capital allowances for plant and machinery’. Although the relevant rules can be quite detailed, the point which will be of most interest is that for new equipment purchases, the cost of such additions up to a figure of £200,000, can be deducted from the net profits of the business for that period. This is called the “annual investment allowance”, and the £200,000 threshold applies from 1 January 2016 onwards. For this purpose, equipment will include all the white goods, furniture and other movable items which are bought for use in the property.
Until recently, treatment of the lettings as a trade also enabled any losses to be used as trading losses and therefore, set against other income generally of the same tax year. Unfortunately, this relief has been withdrawn for furnished holiday lets and losses can now only be carried forward against future profits of the same trade. For this purpose, UK holiday lettings are treated as a separate trade from other lettings in the European Economic Area.
The reliefs which apply to furnished holiday accommodation for capital gains tax purposes are equally beneficial and fall into three broad categories.
Firstly, on the sale of a property used throughout ownership as a furnished holiday let, any capital gain arising on the disposal can benefit from ‘roll over relief’. This applies where all the proceeds are reinvested into another property purchased for furnished holiday letting or indeed, into any other asset used by the vendor for some other trading purpose. Under roll over relief, the gain on the asset disposed of can be treated as being nil and instead, the acquisition cost of the asset acquired is treated as reduced by the amount of the gain, so that in this way the gain is deferred until the replacement asset is eventually sold. It is possible to roll over gains successively without any time limit, although when the trading business ultimately ceases, no further roll over will be available. It should be noted that if a property has not always been let as furnished holiday accommodation, this will impact on the availability of roll over relief so that not all the gain can then be rolled over.
Secondly, the property let as holiday accommodation is treated as a business asset so that in the event of it being given away, perhaps as part of inheritance tax planning in the family, the capital gain on the disposal can be ‘held over’ to the recipient. Hold over relief operates to treat the disposal value as being the donor’s original capital gains tax base cost. The donee then takes the property at that cost price and in this way capital gains tax liability on the gift is avoided.
Thirdly, capital gains tax entrepreneurs’ relief is available for the disposal of a furnished holiday letting business. Entrepreneurs’ relief reduces the rate of capital gains tax payable to a flat rate of 10 per cent. The availability of entrepreneurs’ relief is subject to detailed conditions and therefore professional advice should be sought before reliance is placed upon the availability of the relief. In brief terms, a key point is that there must be a disposal of the business or an interest in the business and not simply one particular asset which has been used in the business. Therefore, if a person has a number of furnished holiday let properties and one of them is sold on the open market through an estate agent, it is unlikely that entrepreneurs’ relief will be available for that one disposal. If, however, all lettings are discontinued and the properties are then disposed of, entrepreneurs’ relief should be available.
At present, the inheritance tax treatment of a property used as furnished holiday accommodation is somewhat uncertain. For some years now, HMRC has maintained the view that properties used for such purposes do not qualify as business assets qualifying for 100 per cent inheritance tax relief (i.e. effectively exemption) because they are within the exclusion for investment assets. HMRC have said that they allow relief in exceptional cases, these being where the services provided with the holiday let are wider than those customarily made available, for example where some meals, cleaning and laundry are provided.
For example, in a recent ruling by an Upper Tier Tribunal, a normal furnished holiday letting business did not qualify for the business property relief as “the scale of the activities undertaken with running the property business were more typical of the type undertaken by an investment business”. HMRC are likely to strongly resist claims for business property relief where the business consists of a single property.
HMRC do operate a non-statutory clearance procedure and furnished holiday let owners may use this to agree whether business property relief is due on their business.
Please note that this Memorandum is not intended to give specific technical advice and it should not be construed as doing so. It is designed to alert clients to some of the issues. It is not intended to give exhaustive coverage of the topic.
Professional advice should always be sought before action is either taken or refrained from as a result of information contained herein.