Furnished Holiday Lets
Tax efficient property investment
What is a Furnished Holiday Let?
A Furnished Holiday Let, also known as a FHL, is a certain type of rental property classification in the UK. This classification provides certain tax advantages to holiday let owners.
What qualifies as a furnished holiday Let?
- Firstly, the property needs to be furnished.
- Secondly, it must be situated in the UK or any other state in the European Economic Area (EEA).
- The property must be available for letting as holiday accommodation to the public for at least 210 days in the year.
- Finally, out of those 210 days the property must actually be let out for 105 days or more as holiday accommodation.
As a result, if a property is let for a continuous period of more than 31 days then this will not qualify as a furnished holiday let.
Most importantly, the above conditions must be satisfied year on year. Therefore, a property could qualify as an FHL for one year but fail to qualify in the next year. So landlords should carefully monitor the length of stays of guests to ensure that they conditions continue to satisfy the conditions.
Why is a FHL treated differently?
Operating a FHL is considered to be a trading activity, on the other hand operating a buy to let property is considered to be an investment activity.
FHL Tax Advantages
The tax advantages attaching to FHL’s take various forms and touch on a range of issues. Some of these are discussed below.
1. Income Tax – Interest expenses
FHL’s have sidestepped George Osborne’s rules to restrict the deductibility of interest expenses to the basic rate of tax. Therefore, as a FHL the interest and finance costs are fully deductible.
2. Capital Allowances
As a trading business the scope of capital allowances is much wider. Tax relief is available for assets which would not gain relief in a buy to let portfolio. Tax relief is also available for certain fixtures integral to the building, such as electrics, heating, water fixtures and fittings.
Relief may also be available for items purchased historically and so can often generate large tax savings.
3. Stamp Duty Land Tax
When purchasing a property, the value liable to SDLT is the consideration paid for the property. Therefore, where other assets are purchased in the same transaction, such as white goods, any consideration payable for these items will not be subject to SDLT.
If as described above these assets qualify for capital allowances significant tax relief can be generated on the purchase.
If you are buying a property with external buildings or an annex relief may be other reliefs available, such as multiple dwellings relief.
4. Inheritance Tax
As a trading business, an interest in FHL may qualify for Business Property Relief (BPR) and as such will not be chargeable to inheritance tax on the death of the owner, or life time transfer of the interest.
To qualify for BPR, FHL’s need to show that they are providing substantial additional services over and above the normal active management of the property necessary to maintain or enhance the capital value or to obtain a regular income from its letting.
There have been various cases before the courts relating to whether a business qualifies for BPR.
In CRC v The PRs of The Estate of Maureen Vigne (deceased) – HMRC argued unsuccessfully that the running of a livery business was a land related business and as such did not qualify for BPR. The executors of the estate won the case on the basis of the additional services provided to the clients of the livery business.
Care needs to be taken to consider whether the services provided are sufficient to be regarded as a business and not simply a passive investment. Such additional services could include;
- assistance with the holiday experience,
- booking restaurants and activities,
- providing advice on things to do in the area,
- extra amenities such as access to hot tubs, pools etc.
5. Capital Taxes – Entrepreneurs Relief
Gains accruing on the sale of residential property ordinarily attract Capital Gains Tax at up to 28%. However, the disposal of a FHL may qualify as a business asset for Entrepreneur’s Relief (ER). So this means that the level of CGT payable may be reduced from 28% to 10%. However, please note that there are a number of conditions that need to be satisfied to qualify for Entrepreneurs relief .
Most importantly, investment properties cannot benefit from ER as they are not considered to be trading.
6. Capital Taxes – Gift relief
Investment properties do not qualify for gift relief, however a FHL will. This can be used as a useful tool in succession planning as a FHL can be gifted to children or grandchildren without incurring any capital gains tax. The relief enables the asset to pass to the next generation without triggering a disposal, therefore the recipient inherits the base cost of the asset and will be assessed on the gain on a subsequent disposal.
7. Pension Contributions
Profits made from FHLs are treated as “Earned Income for tax purposes”. This is important if the landlord wishes to make pension contributions as the amount a taxpayer can pay into his or her pension depends on their level of earned income. This differs from profits on normal letting activities which are not regarded as earnings for pension purposes.
Turning your property portfolio into FHL’s is not a small task, generally speaking FHL’s require more input from the landlord due to the short term nature of the lets and are therefore not suitable if you are only looking for a passive investment.
In conclusion, due to the benefits tax benefits available it is worth considering whether any significant benefit can be gained by changing the nature of the business.