There are special tax rules for rental income from properties that qualify as Furnished Holiday Lettings (FHLs).
To qualify as Furnished Holiday Letting, the property must be furnished. There must be sufficient furniture provided for normal occupation and your visitors must be entitled to use the furniture.
The property must be commercially let (you must intend to make a profit). If you let the property out of season to cover costs but did not make a profit, the letting will still be treated as commercial.
All your FHLs in the UK are taxed as a single UK FHL business and all FHLs in other EEA states are taxed as a single EEA FHL business. You will need to keep separate records for each FHL business because the losses from one FHL business cannot be used against profits of the other.
Accommodation can only qualify as a FHL if it passes all 3 occupancy conditions:
- The pattern of occupation condition – If the total of all lettings that exceed 31 continuous days is more than 155 days during the year, this condition is not met so your property will not be an FHL for that year.
- The availability condition – Your property must be available for letting as furnished holiday accommodation letting for at least 210 days in the year. Do not count any days when you are staying in the property. HMRC do not consider the property to be available for letting while you are staying there.
- The letting condition – You must let the property commercially as furnished holiday accommodation to the public for at least 105 days in the year.
Averaging election
If you let more than one property as a FHL, and one or more of these properties does not meet the letting condition of 105 days, you can elect to apply the letting condition to the average rate of occupancy for all the properties you let as FHLs. This is called an averaging election.
Period of grace election
You may genuinely intend to meet the letting condition, but were unable to. If this happens, you may be able to make a period of grace election that allows the property to qualify as a FHL as long as the pattern of occupation and availability conditions were met.
To make an election, you must be able to show that you had a genuine intention to let the property in the year. For example, where you have marketed a property to the same or a greater level than in successful years, or where the lettings are cancelled due to unforeseen circumstances, including extreme adverse weather.
If your property doesn’t reach the threshold by the fourth year, after 2 consecutive period of grace elections, it will no longer qualify as a furnished holiday letting.
Property closed for part of the year or only part of the property let
If your property is only used as a FHL and is closed for part of the year because there are no customers, you can deduct all the expenses, such as insurance and loan interest, for the whole year, provided you do not live in the property.
If you let part of the property as a FHL, or where you use the property privately for part of the year, you need to apportion your receipts and expenses on a reasonable basis.
What are the tax rules for Furnished Holiday Lettings?
It needs to be noted that FHL is treated as trading income where residential lettings are taxed as investment income.
- Capital Allowances are available on fixtures and integral features within a FHL property and on other capital expenditure incurred for a FHL business.
This includes expenditure on furniture, fixtures and fittings, and equipment, (Normal letting businesses are unable to claim Capital Allowances on this sort of expenditure.)
- Capital Gains Tax reliefs , available for trading businesses can be claimed if a FHL property is sold. These include:
Entrepreneurs’ Relief – allows a taxable gain deriving from qualifying property to be charged at the reduced rate of CGT of 10%. (Gains not eligible to Entrepreneurs’ Relief are subject to a CGT rate of either 18% or 28% depending on the level of an individual’s income and the size of the gain (with a lifetime limit of £10 million). Please note that you may not be allowed to claim Entrepreneurs’ Relief on the sale of a single FHL property when the owner also continues to operate other furnished holiday letting properties.
Roll-over relief – allows specific chargeable gains to be deferred if new trading assets are acquired. Gains on the sale of FHLs can be deferred using this relief and the acquisition of a FHL property can count as a new trading asset allowing gains on other assets to be deferred.
Hold-over relief – if a property is given as a gift, the resulting capital gain can be frozen and will only be liable to capital gains tax when the recipient sells.
- Proportion of profits – If a FHL business is operated by a husband and wife partnership the profits can be allocated in any proportion required – irrespective of their actual shares in the ownership of the FHL property (for a residential property letting business the profit shares for a jointly owed property are taxed in equal shares, in the absence of an election to be taxed on the actual ownership shares). HMRC TSEM9820.
- Pension savings – The profits you make from running a FHL business are classified as ‘relevant earnings’ for pension contributions.
- Losses from FHLs – It used to be the case that losses from an FHL could be offset against other income. This changed from 6 April 2011. Now FHL losses can be carried forward and offset only against future profits from the same rental business.
- VAT – The provision of holiday accommodation is within the scope of VAT. Therefore if the income from the FHL exceeds the VAT threshold the owner must register for VAT.
