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.
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’.
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.