Apart from bringing money into our local shops and businesses, tourists do have one great advantage for tax purposes – they rent holiday homes, which may then qualify as “Furnished Holiday Lettings”.
What is a Furnished Holiday Let? Put simply, a Furnished Holiday Let (FHL) is residential accommodation occupied by holidaymakers.
Provided the property is let to holidaymakers for at least 105 days out of 210 available days each year, excluding any period of continuous occupation by the same persons which exceed 31 days, the property may qualify as a Furnished Holiday Let. Although HMRC have pretty firmly slammed the door on any Inheritance Tax (IHT) reliefs for holiday properties recently, if the property does qualify as an FHL, the door is opened to potentially valuable Capital Gains Tax (CGT) reliefs such as hold-over or roll-over relief and in some circumstances Entrepreneurs Relief as well.
During low season, the property may still be let to longer-term residents (those staying for longer than 31 days) without affecting the CGT reliefs but the 105/210 letting day rule must still be adhered to and non-holiday letting use must not exceed 155 days in the relevant period. In particular, your own personal and family use would not count towards either the 105-day occupation or 210 day rules as the property is not available to holidaymakers whilst you are using it yourself. The furnished holiday letting of a property should be undertaken with a realistic expectation of a profit – basically on a commercial basis.
The 105-day requirement may be met from averaging the occupation of several FHL properties owned by the same person by election, or alternatively a “period of grace” election may be possible to average the occupation of a single property across two consecutive periods. Starting and cessation periods have slightly different rules in how to calculate the “relevant period” in order to determine whether or not the letting continues to qualify.
At this stage, three additional quick points should be noted. Firstly, FHLs within the EEA are treated the same as those within the UK but you are not entitled to merge the occupancy periods between EEA and UK properties for the averaging election. Secondly, Rent-A-Room relief may apply if you let one or more rooms in your own residence, which may give an additional income tax relief even if the letting itself does not qualify as a FHL. Finally, the supply of any holiday accommodation is a VATable supply. This should be borne in mind if you are already in business as the turnover of your FHL may need to be combined with your other business turnover to determine whether or not you should be registered for VAT
The commerciality aspect of running an FHL should not be underestimated. Where there is part private usage of the property, you should ensure that there are suitable adjustments to claims for expenses. HMRC would also expect to see an active role being played by the owner in the running of the business. For these purposes, being “actively involved” in the letting does not mean merely purchasing a property as an investment and then handing responsibility for it over to a letting agent who then just happens to let it to holidaymakers. Rather, this might involve making all the holiday arrangements (advertising, etc) and being involved with day-to-day management. Whilst there is nothing wrong in using a letting agent to source your holidaymakers or to look after the running of the property, it does become harder to demonstrate the active involvement requirement.
However, where the property does qualify as an FHL, the CGT reliefs can be extremely generous. Entrepreneur’s Relief has the power to reduce the rate of CGT down to 10% on any disposal profit, whilst the CGT roll-over relief allows you to reinvest the proceeds of the sale into any qualifying business asset – either a replacement property for your next FHL activity or into a completely different business.
Possibly the most generous relief for long-term tax planning however is the hold-over relief. This would enable you to gift an FHL property down to the next generation without triggering the capital gain as the new owner would acquire the property with your purchase history (provided of course that they themselves continue to let the property for FHL purposes). The gift would be a “Potentially Exempt Transfer” for IHT purposes and therefore provided that you survive seven years from the date of the gift, the value of the property would have passed from your Estate, potentially saving IHT at 40%. Of course, there are other effects of making such a gift (for example, the recipient would not receive the tax-free uplift for CGT purposes on death and therefore the IHT saving must be weighed against the longer term CGT effects when doing this sort of planning).
As we are now part-way through the holiday season, ensuring that your property continues to qualify as an FHL should be high on the agenda. For example, by reviewing your letting occupancy part way through the summer, you should be able to determine whether or not your 105-day minimum occupancy for the year will be met. If it is likely to fall short, then you could take active steps to counter this. You may undertake some more targeted advertising or offer holidays at a reduced rent to encourage take up. Bear in mind of course that one of the first benchmarks of a “business” in the eyes of HMRC is that the activity should make a profit. Operating a business at a loss purely to achieve a tax relief is likely to be frowned upon.
So the next time you can’t find a parking space in Aldeburgh because the streets are thronging with holidaymakers, just spare a thought for the potential Capital Gains Tax that they might be saving someone.
For further information on any of the above points or to discuss your tax affairs generally, please do not hesitate to contact Robin Beadle.