Furnished Holiday Lets: The Tax Implications

Currently, Furnished Holiday Lets (FHLs) are treated differently by HMRC for general taxation, with qualifying FHL businesses treated as trading businesses, yet those same businesses are treated as investment businesses when it comes to capital taxation. The trading benefits were hard won, but the anomaly is recognised by HMRC.

Every Furnished Holiday Let is different and, while this sheet offers a general guide, professional advice from an accountant should be sought.

In summary, qualifying FHL’s have various tax benefits for individuals and companies:

• On sale, the seller can claim certain Capital Gains Tax reliefs (Business Asset Rollover Relief, Business Asset Disposal Relief, relief for gifts of business assets and relief for loans to traders).
• The business can claim Plant and Machinery capital allowances for capital items such as furniture, equipment, and fixtures.
• Profits count as earnings for pension purposes, so pension contributions can be made in line with profits, thereby increasing tax relief on pensions.
• Interest costs are not subject to the finance interest restriction applicable to other property businesses.

To benefit from these rules, the profit or loss from FHLs needs to be worked out separately from any other rental business.

FHLs may be located in either the UK or the European Economic Area (EEA), but FHLs in the UK will be treated as comprising a different FHL business to those in the EEA.

To qualify as a Furnished Holiday Let:

• The business must be carried on a commercial basis with a view to profit.
• The property must be provided fully furnished.
• It must be let for at least 105 days each year.
• It must be available for letting for at least 210 days each year and HMRC have confirmed that during Lockdown the property is still classed as available for let although legally it could not be let.
• ‘Lettings’ must comprise short term lettings of no more than 31 days.
• If the property is let out for periods longer than 31 days in one stretch, then none of the days will count towards the 105- and 210-day letting conditions.

If the total of all or any ‘longer term occupation’ let’s is more than 155 days in the year, the property will no longer qualify as a furnished holiday letting.

• For the purpose of determining qualification, the relevant year for unincorporated businessesof 12 months ending with the last day of the accounting period for companies) but will be the first 12 months from the date of first letting and the final 12 months to the end of the final letting.

Averaging Election

If more than one property is let as a FHL, and one or more of these properties does not meet the letting condition of 105 days, an election can be made to apply the letting condition to the average rate of occupancy for all the properties let as FHLs. This is called an averaging election.

Only properties in a single FHL business may be averaged and UK and EEA FHL properties cannot be averaged together.

Where the let day limit of 105 days is not reached in a year despite every effort being made to meet it, the owner can elect for a year’s grace. The second of two consecutive years can also be elected for but only if an election was made for the first year. This period of grace must follow a qualifying period.

If the property is closed for part of the year or only part of the property is let

If a property is only used as a FHL seasonally and is closed for part of the year due to lack of guests, all the expenses (insurance and loan interest, etc) for the whole year may be deducted, provided the property is not occupied.

If the property is partly let as a FHL, or if the property is used privately for part of the year, receipts and expenses may be apportioned on a reasonable basis.

If the property stops being an FHL

A property will no longer be classified a FHL if the:

• Property is sold.
• Property is used for private occupation.
• Letting condition is not met even with the averaging and period of grace elections.

If a property does not qualify as an FHL or stops being a qualifying FHL, the special tax treatment will no longer apply.

Advantages of Furnished Holiday Lettings

There are a number of tax advantages in having a qualifying FHL:

• Capital allowances can be claimed on the property furnishings, as well as integral features incorporated in the building, such as wiring, lighting, and plumbing.
• Business Asset Disposal Relief (BADR) may be available on the sale of the business, reducing the rate Capital Gains Tax from 18% or 28% to just 10%.
• If the FHL is gifted, a joint claim for gift relief may be made which would treat the transfer as no gain / no loss.
• The net FHL income will be relevant income for pension purposes. This means that the maximum pension relief is increased.
• The gain on the sale of a FHL can be rolled over into the purchase of another qualifying asset (essentially a business asset), not necessarily a FHL, and vice versa.
• The property may qualify for business rates and the Small Business Bonus Scheme offering up to 100% relief. Business rates apply if the property is available for holiday letting for at least 140 days per year.
• 100% of interest costs incurred are deductible against income.

Disadvantages

• Losses on FHL businesses can only be offset against future income from the same business.

• The losses of an EEA FHL business and a UK FHL business cannot be set-off against each other, even in the same year.
• VAT must be charged if the registration limit (currently £85,000 in the UK) is exceeded. This includes all business income earned by the same person, for example farmers and consultants might find they need to charge VAT even though their FHL income was well below the limit. For VAT purposes, holiday letting activity is usually treated as supplied in the territory where the property is located. Those with FHLs in EEA countries will need to consider local VAT rules. VAT is a specialist area, and advice should be sought.

Planning points

• Where property is owned with a spouse, profits and losses can be split as agreed between the parties, rather than needing to be split 50/50.
• It may be possible to claim capital allowances on the integral features in a property purchased for use as a FHL.
• Interest relief may be available against FHL profits on loans secured on a main residence and used to buy the property.

Business Property Relief from Inheritance Tax

Business Property Relief (BPR) is valuable in mitigating exposure to IHT. The relief reduces the chargeable value of the business assets (land, buildings, machinery, etc) transferred during lifetime or on death by 50% or 100%.

When FHL legislation was introduced in 1984, HMRC accepted that FHLs qualified for BPR on actively managed holiday lets. Following legal advice received by HMRC in 2008, it reversed its opinion and advised that BPR would generally be refused.

Businesses found to mainly involve the ‘holding of an investment’ will not be eligible for BPR will be available. Although the legislation which deems income and gains form FHLs be regarded as ‘trading’ in nature, this sadly now has no application to IHT.

A case concerning an FHL owned by a Mrs Pawson was heard in 2012, the Upper Tribunal reversing an earlier ruling by the First-tier Tribunal and refused BPR. A similar case (Green v HMRC) in 2015 also failed. Since then, we have reported on two other cases, Pawson, and Ross, both of which were unsuccessful in their claims for BPR.

Whilst a business can be described as a FHL, being let out for the prescribed amount of days per year, and being fully furnished, the activities that fall on the ‘investment’ side are determined to be time spent finding occupants, making arrangements with them, collecting rent, insuring the property, incurring expenditure of repairs and decoration, and maintenance of the garden. These all enhance the capital value of the property and make it possible to obtain regular income from its letting.

‘Additional services’ including cleaning, providing welcome packs, liaising with guests, providing utilities and linen are generally not deemed sufficient to prevent the business from being viewed as wholly or mainly an ‘investment’ business. However, in Graham, the taxpayer was found to carry out additional services sufficient to support her claim for BPR.

HMRC provides little guidance on how businesses can provide adequate services to fall on the side of ‘trading’ vs ‘investment’. There are two options available to owners of FHL businesses:

1. Provide a higher level of services to guests
   • Provide services that a hotel / guesthouse guest might expect – newspapers, daily cleaning, early morning calls, welcome packs, arrange food or provide catering, transport, etc.
   • These services should be marketed on websites and in printed material.
   • As we have seen in the 2022 case of Firth v HMRC (see BPR guidance sheet), these services such as out of hours calls, should not be outsourced, and must be evidenced.

1. Provide a wider holiday or leisure experience for guests
   • Providing outdoor pursuits and activities giving the guest a wider overall experience. This could be provided by a member of staff (gamekeeper / guide) as part of a larger business.

When applied to farms and landed estates, the BPR position will be considered in light of the whole of the business, where the FHL forms part of a larger entity. An important IHT decision for estate owners was the HMRC v Brander case.

Brander claimed BPR on let houses and cottages on the basis that they were managed as part of a larger estate management business, which was wholly or mainly a ‘trading’ business. This was upheld at an Upper-Tier Tribunal. The question of whether an estate management business consists mainly of holding investments is based on looking at the business as an entire entity and assessing the relative importance of investment and noninvestment activities, the turnover and profitability of various activities, the activities of staff employed by the business, the acreage of the land dedicated to each activity and the capital value of that acreage.

The most recent case in 2022, Firth v HMRC, was unsuccessful because the services provided were not exceptional to the norm, and there was insufficient evidence to support the claim, which was the key issue in that case. The FTT concluded that the additional services offered did not outweigh the investment elements of the business. Further information can be found on the separate BPR guidance sheet.

It is a complicated and not yet completely resolved area. Members should contact their Accountant or Tax Consultant for more information.

Disclaimer – Guidance Sheets are written by experienced Members of the ASSC and other experts. The information in the ‘Guidance Sheet’ is provided by the ASSC for use by Members in support of their own independent business decisions. It does not constitute advice or instruction for which the ASSC can be held liable in any way whatsoever. All Members and other readers remain responsible for the consequences of any decisions taken whether in the light of information gained from this Guidance Sheet or not.