When it comes to taxing rental income, not all properties are equal. Different rules apply to properties which meet the definition of ‘furnished holiday lettings’ (FHLs). While the current rules are not as generous as they once were, they still offer a number of tax advantages over other types of let.
Advantages
Properties that count as FHLs benefit from:
- Capital gains tax reliefs (business asset rollover relief, entrepreneurs’ relief, gift relief for business assets) which can reduce the tax bill when you dispose of the property; and
- Plant and machinery capital allowances giving you a tax deduction for the cost of furniture, fixtures and fittings
In addition, the profits count as earnings for pension purposes.
What counts as an FHL?
For a property to count as an FHL it must meet several tests. It must be in the UK or the European Economic Area (EEA), it must be furnished and it must be let commercially (i.e. with the intention of making a profit).
The property must also pass three occupancy conditions. The tests are applied on a tax year basis for an ongoing let, the first 12 months for a new let and the last 12 months when the let ceases.
The “pattern of occupancy” condition
Periods of longer-term occupation, when the same person occupies the property for more than 31 continuous days in the year, cannot exceed 155 days. So, if the property is let to longer term tenants in the off season, this condition may not be met.
The “availability” condition
The property must be available for let as furnished holiday accommodation for at least 210 days in the tax year. If the owner stays in the property, it is not available for letting on those days.
The “letting” condition
The property must actually be let on a commercial basis for at least 105 days in the year. Periods when the property is let to family or friends at a reduced rate or free of charge are ignored as they do not count as commercial lets.
Is it worth trying to meet the three conditions?
While FHLs do enjoy favourable tax treatment, these are only available if the associated conditions are met. While FHLs, particularly in prime tourist locations, may be able to command high rental values in high season, the properties may lie empty for several weeks for the off season. By contrast, a longer term let will offer an element of security that multiple short lets may not provide. These factors will need to be weighed up in deciding whether to strive to meet the FHL conditions.