With an increasing number of holidaymakers staying on British soil for the foreseeable future, those looking to buy an investment property may wish to consider a holiday let. Not only do second and subsequent homes benefit from SDLT savings as a result of the temporary increase in the SDLT threshold, they can also benefit from the favourable tax regime for furnished holiday lettings (‘FHLs’).
There are special tax rules for properties that qualify as furnished holiday lettings:
- tax relief can be claimed for the cost of furniture, equipment and fixtures;
- capital gains tax reliefs available to traders also apply to FHL owners on disposal of their business, including business asset disposal relief, business asset rollover relief, relief for gifts of business assets;
- FHL profits count as earnings for pension purposes.
Conditions to qualify as an FHL
The property must be in the UK or in the EEA, it must be let commercially and it must be furnished. In addition, it must meet three occupancy conditions:
- pattern of occupancy condition – the total of all lettings that exceed 31 days is not more than 155 days in the year;
- the availability condition – the property must be available for letting as furnished holiday accommodation for at least 210 days in the tax year; and
- the letting condition –the property must be let commercially as furnished holiday accommodation to the public for at least 105 days in the year.
If the property does not meet the letting condition (which may be the case, for example, if there are further lockdowns) all is not lost. Where the landlord has more than one property let as a FHL, the letting condition is treated as met if the average rate of occupancy for all properties is at least 105 days in the year. To take advantage of this, the landlord must make an averaging election no later than one year from 31 January following the end of the tax year (i.e. by 31 January 2023 in respect of an election for 2020/21).
The second way of qualifying as a FHL in a year where the letting condition has not been met is to make a “period of grace” election. This route can be taken where there was a genuine intention to meet the condition but this did not happen due to unforeseen circumstances (such as lettings cancelled due to lockdowns). To be eligible to make an election, the pattern of occupation and the availability conditions must have been met and, for the first year for which a period of grace election is made, the lettings condition must have been met in the previous tax year. A further period of grace election can be made for the following year if the lettings condition is not met that year. However, if after two successive period of grace elections the letting condition is not met, the property will cease to qualify as a FHL.
The residential SDLT threshold is increased to £500,000 where completion takes place between 8 July 2020 and 31 March 2020. This also benefits those purchasing second and subsequent residential properties, although the 3% supplement will still apply. However, the clock is ticking and completion must take place by 31 March 2021 to benefit from the savings.