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 and Ireland (and other European countries). This classification provides certain tax advantages to holiday let owners.
What qualifies as a furnished holiday Let?
- The property needs to be furnished.
- The property 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.
- Out of those 210 days the property must actually be let out for 105 days or more as holiday accommodation. If you have multiple properties, there is an “averaging election” which can be made in certain circumstances which can help satisfy this condition where some properties are let out for fewer than 105 days.
As a rule, if a property is let for a continuous period of more than 31 days then this will not qualify as “letting as holiday accommodation”.
The above conditions must be satisfied year on year. A property could qualify as an FHL for one year but fail to qualify in the next year. Therefore, landlords should monitor carefully the length of stays of guests etc. to ensure the conditions continue to be satisfied.
Why is a FHL treated differently?
The difference in tax treatment stems broadly from the fact that operating a FHL is considered to be a trading activity whilst a buy to let property is considered to more of an investment activity.
FHL Tax Advantages
The tax advantages attaching to FHLs take various forms and touch on a range of issues.
Income Tax – Interest expenses
FHL’s have sidestepped George Osborne’s announcement to introduce rules to restrict the deductibility of interest costs to the basic rate of tax. As a FHL the interest and finance costs are fully deductible.
As a trading business the scope of capital allowances is much wider. Tax relief is available for assets which may not gain relief in a buy to let portfolio. Fixtures integral to the building may be claimed, such as electrics, heating, water fixtures and fittings.
Relief may be available for items purchased historically and a claim can be made for these items resulting in a reduction in taxable profits and can generate large tax savings. This can generate large savings on from income tax and can reduce the SDLT paid on the property where part of the purchase price is allocated to qualifying assets (see below).
Stamp Duty Land Tax
When purchasing a property, the value liable to SDLT is the consideration paid for the property. Where other assets are purchased such as white goods, fixtures and fittings any consideration payable for these items will not form part of the consideration chargeable to SDLT.
If as described above these assets qualify for capital allowances significant tax relief can be generated on the purchase.
Allocating consideration to integral features in a way that will be accepted by HMRC can be tricky and specialist advice should be sought.
In addition if you are buying a property with external buildings or an annex relief may be available where you are purchasing multiple dwellings.
As a trading business an interest in FHL may qualify for Business Property Relief (BPR) and will therefore 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 as sufficient to be regarded as something more than a passive investment. Such supporting activities could include ongoing assistance with the holiday experience which could also earn commissions, booking restaurants and activities, providing advice on things to do in the area, extra amenities such as access to hot tubs, or other facilities.
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 qualifying FHL will qualify as business asset for the purposes of Entrepreneur’s Relief (ER). This means that the level of CGT payable can potentially be reduced from 28% to 10%. Please note that there are a number of conditions that need to be met to qualify for Entrepreneurs relief which also need to be satisfied.
Investment properties cannot benefit from ER as they are not considered to be trading.
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, instead the recipient inherits the base cost of the asset and will be assessed on any gain on a subsequent disposal.
Profits made from FHLs are treated as Earned Income for tax purposes. This is important if the landlord wishes to make pension contributions. In these circumstances, the amount a taxpayer can pay into his or her pension depends on the level of their earnings. This differs from profits on normal letting activities which are not regarded as earnings for pension purposes.
Turning your property into a FHL is not a small task, generally FHL’s require more input from the landlord due to the short term nature of the lets and are therefore not suitable is you are looking for a passive investment.
However due to the benefits tax benefits available it is well worth considering whether it is worthwhile changing the nature of the nature or if in deed the business already qualifies.