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Furnished holiday lettings

Furnished holiday lets (FHL) benefit from tax reliefs normally associated with trading ventures, while the profits from the lettings are still treated as rental income. There are, however, several conditions which must be met for a property to qualify as an FHL and some important tax implications.

To qualify as a furnished holiday let (FHL), the property must be available for commercial letting to the public for at least 210 days in a 12-month period and it must actually be let for at least 105 days in that period. Where a property is first let, the 12-month period runs from the date of the first letting. Otherwise the 12-month period will normally be the fiscal year.

However, for longer term lets (more than 31 days but no longer than 155 in a 12-month period) none of the days will count towards the letting condition of 105 days. If the total of all or any longer-term lettings is more than 155 days, the property will no longer qualify as an FHL for that period.

Income tax relief

FHLs are treated as a trade for income tax purposes and accounts should be prepared in the same way as for any other trading business. Capital allowances can be claimed for equipment purchased for use in the property such as white goods, furniture and other portable items under the heading ‘capital allowances for plant and machinery’.

The cost of new equipment purchases up to £200,000, can be deducted from the net profits of the business for that period. This £200,000 threshold is called the ‘annual investment allowance’.

Inheritance tax

At present, the inheritance tax treatment of a FHL is somewhat uncertain. HMRC maintains the view that FHLs do not qualify as business assets eligible for 100% 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 where the services provided by the FHL are wider than those usually made available; for example where some meals, cleaning and laundry are provided.

Capital gains tax relief

  1. Any capital gain arising on the sale of a FHL can benefit from ‘roll over relief’. This applies when all proceeds are reinvested into the purchase of another FHL, or any other asset used by the vendor for some other trading purpose.

    Under roll over relief, the gain on the sale is treated as nil and instead, the cost of the asset acquired is reduced by the amount of the gain. 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. Note: The availability of roll of relief is limited when a property has not always been a FHL.
  2. The FHL is treated as a business asset so in the event of it being given away, perhaps as part of inheritance tax planning, the capital gain on its disposal can be ‘held over’ to the recipient. Although the disposal is made at Market Value for capital gains tax purposes, the recipient is treated as taking on property at the donor’s cost price and in this way capital gains tax liability on the gift is avoided.
  3. Capital gains tax entrepreneurs’ relief is available for the disposal of a FHL. Entrepreneurs’ relief reduces the capital gains tax payable to a 10% flat rate. This relief is subject to detailed conditions and therefore professional advice should be sought before reliance is placed upon its availability.

Download the PDF version Tax facts – Furnished holiday lettings

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