A FHL is when you own a property that you rent on short term agreements. It is an option for property owners to earn an income. Like other property you may own, it needs to be reported to HMRC on your yearly tax return. There are special rules that must be applied FHLS compared to other non-FHL properties.
FHL is taxed as a property business but it is treated as a trade for some tax purposes. This gives it some advantages over the non-FHL property business, for example capital allowances may be claimed and the property owner may benefit from certain Capital Gains Tax reliefs.
What qualifies as a FHL?
FHL treatment is available for a property for a tax year/accounting period where all of the conditions below are satisfied.
- The commercial basis condition. The property is let on a commercial basis with a view to making a profit.
- The location condition. The property is situated in the UK or within the European Economic Area.
- The furnished condition. The property is let furnished. For HMRC, this means that “there must be sufficient furniture provided for normal occupation”.
- The availability condition. The accommodation is available for commercial letting to the public as holiday accommodation for at least 210 days in the relevant period.
- The letting condition. The accommodation is commercially let as holiday accommodation for at least 105 days in the relevant period excluding any ‘periods of longer-term occupation’ (over 31 days) are excluded. Watch out for periods where the property is let to the owner’s relatives/friends other than on commercial terms – HMRC guidance is that such periods should not be counted in applying this condition.
- The pattern of occupation condition. During the ‘relevant period’, there is not more than 155 days falling within ‘periods of longer-term occupation’.
If your let meets all of the above conditions it is then referred to as a qualifying holiday let.
What are the tax implications for FHLs?
Purchase:
Furnished holiday lettings qualify for favourable tax treatment for certain income tax and capital gains tax purposes. The favourable treatment applies both where the property is owned and let by individuals or acquired via and let by a company.
There are no special provisions applicable for Inheritance Tax purposes and owners of furnished holiday let properties have generally in the past failed to convince the courts that Business Property Relief (BPR) should apply. This doesn’t mean it should be ruled out in every case, but it would be safest to proceed on the assumption there will be no BPR either on the properties or shares in a furnished holiday let company.
Income tax consequences:
All the furnished holiday lettings by a particular person are treated as one furnished holiday letting business. The profit or loss is calculated separately from other rental business profits or losses (but using the same principles). It is included in overall property business profits except in the case of losses that can only be carried forward against the profits of the same furnished holiday letting business in the UK.
Unlike the situation for other residential property that is let, capital allowances are available on plant and machinery used in the accommodation (hence there is no deduction for expenditure on replacing furniture).
The income that an individual receives from letting furnished holiday accommodation counts as ‘relevant UK earnings’ for pension purposes. This means that even if the individual is not UK-resident, he is entitled to tax relief on pension contributions.
The losses are treated as trading losses of a deemed trade and can be carried forward against future profits from the same deemed trade.
Corporate Gains Tax Reliefs:
Even though a FHL is treated as a business (for incorporation relief purposes for example), it is not a trade. However, FHL is treated as a trade for specific Capital Gains Tax purposes which does have some consequences.
Rollover relief on replacement of business assets:
Properties within the portfolio may be sold without giving rise to a capital gain if the proceeds are wholly reinvested within 12 months before and three years after the sale and the new property is immediately used for the furnished holiday letting business.
Business Asset Disposal Relief (formerly entrepreneurs’ relief):
Business Asset Disposal Relief (BADR) may be available on the disposal by an individual of all or part of the business or of shares in a company that carries on the holiday letting business.
Gift relief:
Any gain arising on a gift of the let property (or shares in the personal company that carries on the furnished holiday letting business, as long as it doesn’t carry on other, non-trading activities) will not be a chargeable gain if a gift relief claim is made. The gain that would otherwise have been chargeable is deducted from the base cost of the property or the shares.
Relief for loans to traders:
A loan that is used by the borrower to finance a furnished holiday letting business may be a ‘qualifying loan’ for the purposes of claiming an allowable CGT loss if all or part of it subsequently becomes irrecoverable. This could apply to family members (other than spouse or civil partner) or friends wishing to invest in the business.
Substantial shareholding exemption:
A UK property business that consists of furnished holiday letting is also treated as a trade for the purposes of the substantial shareholdings exemption, consequently the disposal of shares in a company that carries on a furnished holiday letting business is not a chargeable gain if the other conditions for exemption are satisfied.
Can you reduce the amount of tax you pay?
As FHL is treated as a business you can offset some of your costs against the income you make which will help in reduce your tax bill. Here’s some example:
- Heat and other eligible utilities
- Waste collection
- Accounting costs
- TV licence
- Letting agency fees
What’s the difference between FHL and a buy-to-let?
Typically FHL carry a greater risk than buy-to-lets due to the nature of short-term agreements. FHLs are likely to be empty for longer period of time than buy-to-lets making the income not as consistent and the expenses possibly higher. You also need to acknowledge that a FHL requires furniture which could result in more wear and tear as compared to a buy-to-let that does not require furniture. All of this can eat into your profits.
It is also important to note that FHL is treated as a business for purposes as compared to a buy-to-let which is treated as an investment instantly changing the tax rules and increasing income tax.
The guidance here is for general purposes and may not all be suitable for you. It is vital that you speak to a tax specialist who can cover your personal circumstances and ensure you are getting the correct information for you.
If you have a question on your FHL, get in touch and let’s find the best solution for you.