If you are thinking of taking the plunge into the world of Furnished Holiday Lets (FHLs), or indeed if you have already done so, there are some key tax points of which you should be aware. We have highlighted the main ones below, though it should be stressed that there are intricacies that we are not able to cover in an article such as this and taking expert advice is always recommended.
The property must be within the UK or the EEA.
The property must be let furnished, available for letting at least 210 days a year and actually commercially let for at least 105 days where no single let is for a continuous period of more than 31 days. There are elections available for a “period of grace” or for “averaging” that can assist if the above conditions are not met in a tax year.
FHLs are treated separately from other rental properties as they are deemed to be a trade for income tax and capital gains tax purposes. This gives them access to potentially valuable capital gains tax reliefs such as holdover relief, rollover relief and entrepreneur’s relief. Additionally, the profits from an FHL counts as earnings for pension purposes.
Where an FHL is owned jointly by a married couple / civil partners and one partner is operating the FHL, it may be possible in some circumstances to allocate the income to that partner for income tax purposes and over-ride the normal 50/50 split. A careful review of the circumstances and professional advice is important in these circumstances.
FHL rental profits are calculated differently to other rental properties meaning profits and losses cannot be offset between the two. However, unlike other residential rental properties there is no restriction on financing costs. Capital allowances are available on certain expenditure on furniture, equipment and fixtures where the accruals basis applies (most capital expenditure is fully deductible for smaller businesses using the simplified cash basis, although there are some exceptions).
FHLs are not automatically treated as a trade for the purposes of Inheritance Tax and do not generally qualify for any IHT relief. It is possible, however, to qualify for IHT Business Property Relief if the quantum of “other services” provided is sufficient. There are a number of decided tax cases on how much activity is needed and professional advice should be sought if there is doubt. As a general rule of thumb, the more “hotel like” services that are provided (for example daily cleaning of the property, provision of meals etc) the stronger the argument that IHT relief should apply. It is worthy of passing comment that in the recent review of IHT by the Office for Tax Simplification a recommendation was made that FHLs be treated as being automatically entitled to IHT relief. However, that is merely a recommendation and nothing may come of it.
The rental income of an FHL is a standard rated supply. As a result, if the FHL income is significant enough, or if you have other VATable income which, together with your FHL rental income pushes you over the VAT registration threshold you will need to charge VAT on the rents. There is a risk here for an FHL owner who also has a trade. The income of both the FHL and the trade combined must be taken into account in determining whether there is a need to register for VAT. This may mean that someone who has not had to charge VAT on their services to date suddenly has to do so. This is only the case if the trade and the FHL are in the same ownership, so there is a possibility to address this situation in many cases by reviewing the respective ownerships.
So, there it is in a nutshell. FHLs offer on the one hand a number of tax advantages over “ordinary letting”, but there are traps to avoid and a need to undertake some planning to obtain the benefit of those tax advantages.
For further information please contact Danny Clifford, tax & trust partner.