Where a furnished rental property is designated as a ‘furnished holiday letting’ (FHL) there are several advantages over a normal let property as it is basically treated as a trade for certain tax purposes. This includes tax relief to be claimed on expenditure on fixtures and fittings and also provides entitlement to various capital gains reliefs when the property is subsequently sold, replaced or gifted.
Owners of FHLs should endeavour as far as possible to comply with the specified letting rules outlined below, thus ensuring that the property qualifies for the favourable tax advantages.
Qualifying letting periods
- The FHL property must be available for commercial holiday letting to the public for at least 210 days per year AND be actually let as holiday accommodation for 105 days per year.
- It must not normally be let for a continuous period of more than 31 days to the same tenant in seven months of the year.
There are two ways to help owners of FHLs to reach the above thresholds. If an owner owns more than one FHL the ‘averaging’ election might be helpful and if a FHL meets the thresholds in some years but not in others, then a ‘period of grace’ election is currently available.
Location of property
- All FHL properties which are located in the UK are treated as one ‘business’ and all properties located in other EEA states are taxed as a separate ‘business’.
- Expenditure on fittings, furniture and equipment (and certain integral features) qualifies for a 100% annual investment allowance (AIA) up to £250,000 pa for expenditure incurred between 1 January 2013 and 31 December 2014.
- The availability of the AIA means that expenditure on such assets installed in a qualifying FHL property can be wholly written-off for tax purposes in the tax year in which the expenditure is incurred.
- Note however that there are no capital allowances available on the cost of the property itself or the land on which it stands.
- Revenue expenditure incurred in the pre-letting period, such as advertising costs or repairs can be deducted against rental income received during the first tax year.
- Expenditure incurred in renovating a property so that it is brought into a condition fit for letting are treated as capital costs.
- Where the property is used by the owner (or their family at a nominal rent) then any qualifying expenditure must be restricted by the private use proportion on a just and reasonable basis.
Treatment of FHL losses
- Where a net loss, after deduction of any capital allowances, is incurred on UK located FHLs it can only be offset against UK FHL profits of a later tax year.
- Likewise where a net loss is incurred on FHLs located elsewhere in the EEA then it can only be carried forward against future profits of the same properties.
- ‘Sideways’ loss relief, which prior to 2011 allowed losses on FHLs to be set against other types of taxable income, is unfortunately no longer available.
Capital gains tax advantages of FHL
Qualifying FHL properties continue to be treated favourably for CGT. FHLs are classified as ‘business’ assets and are therefore eligible for the following CGT business reliefs:
- Entrepreneurs’ Relief ~ resulting in a CGT reduced rate of 10% payable on any capital gains arising on the disposal of the property (up to a lifetime limit of £10 million)
- Gift Relief ~ which means that where a property is gifted the capital gain arising can be frozen and will only become liable to CGT on a subsequent disposal by the recipient.
- Replacement of Business Asset Relief ~ which allows a capital gain arising on the disposal of a FHL to be deferred by setting it against the cost of a replacement business asset acquired within three years of the disposal.
Inheritance tax position of FHL
- Following a Tribunal decision made in favour of HMRC in January 2013, 100% Business Property Relief is only likely to be available on furnished holiday lettings where the services provided are at a substantially more significant level than those provided on a standard let property.
- Therefore in the vast majority of cases a FHL left on death will be treated as investment property (rather than business property) and as such fully chargeable to Inheritance Tax as part of the deceased’s estate.
- For lifetime transfers, a FHL property will only become chargeable to IHT should the donor die within seven years of the date the property was gifted.
Value added tax position of FHL
- The rental income from a FHL is regarded as taxable turnover for VAT which means that if an owner is already registered for VAT then they must also charge 20% VAT on the FHL rentals payable by tenants.
- Where the rents from a FHL taken together with turnover from an unregistered business exceed £79,000 in a 12 month period, then that person should register for VAT.
- Where however a FHL is jointly owned with a spouse then the rental income is received in a different capacity so VAT should not be an issue.