Furnished Holiday Lets
As the sun has finally arrived, it’s a good time to consider Furnished Holiday Lets (“FHL’s”). Broadly, an FHL is a commercial letting of a residential property which meets certain criteria to qualify for special tax reliefs.
The qualifying criteria became much stricter from 6 April 2012 and the benefits of FHL’s were restricted. However, there are still generous reliefs on offer. It is important to note that to qualify the property must be located in the UK or the European Economic Area (EEA). Therefore a UK resident individual owning property in France could qualify, while a property in Switzerland could not be treated as an FHL.
FHL’s can be owned by limited companies, but today we are only considering property owned by individuals.
The qualifying criteria are based around the availability and length of letting. Broadly, the property must be:
- available to the public as holiday accommodation for at least 210 days in the tax year, and
- actually be let for 105 days in the year, and
- any letting for over 31 consecutive days to the same occupier does not count toward the 105 day test.
Where more than one FHL is owned, the properties can be grouped so that the average number of days as a whole may meet the 105 day test. Not all properties have to be included in the election for averaging.
In certain circumstances, the 105 day test can be relaxed for one or two years – if there was a genuine intention to meet the test. After two years, the property will cease to qualify.
Benefits of an FHL
Very briefly, some of the benefits of an FHL are as follows:
- Capital allowances – owners of an FHL can claim capital allowances on furniture and white goods.
- Entrepreneurs Relief – where a qualifying property has been owned for over 12 months before sale, the capital gain should qualify for the 10% rate of Capital Gains Tax, whereas gains on other residential buy to lets will be taxed at 18% or 28%.
- Holdover relief – FHL’s can be gifted and holdover relief can be claimed so that any capital gain is taxed on the recipient when they eventually dispose of the property.
- Roll over relief – where a qualifying FHL is sold and the proceeds are re-invested in another FHL, the capital gain from the first disposal can be rolled into the second property. Gains on certain other business assets can also be rolled into FHL’s in the same way, or vice versa, subject to criteria. Similarly, to holdover relief, the gain would not become taxable until the sale of the second property.
- Finance cost restriction – mortgage interest and similar costs will not be fully deductible for standard buy to lets from April 2017. FHL’s are not subject to this restriction.
- Joint ownership by spouses or civil partners – income from FHL’s can be allocated in a much more flexible way compared to standard residential property lets.
The benefits have been described briefly, if you are concerned about a particular relief or one of the limits mentioned above please contact our Tax Director, Jenny Marks.
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