The Covid pandemic, coupled with a change in the rules around business rates, has left holiday property owners with a number of issues to consider. This article aims to summarise the main points.
Firstly, we will consider the impact of the national lockdowns on the day counting criteria which owners of furnished holiday lettings (FHLs) must meet in order to qualify for the associated tax privileges. We will then go on to explain the new rules concerning small business rates versus council tax for FHL owners.
What will be the consequences if a FHL was not let for the requisite number of days in the 2021/22 tax year due to lockdown restrictions?
To qualify as a FHL, a property must be let on a commercial basis and:
- Be available for letting for at least 210 days (30 weeks) per year; and
- Actually be let to members of the public for at least 105 days (15 weeks) per year
The relevant year during which these day count tests are considered is usually the tax year, but for a new business the relevant year is 12 months from the first day of letting.
The national lockdowns in the UK varied between different regions but applied, on and off, between March 2020 and May 2021; these periods of enforced inactivity have resulted in many FHL owners having had insufficient bookings to meet the above criteria. Fortunately, a concession was introduced several years ago to allow a “period of grace” to cover situations such as foot and mouth outbreaks, economic downturns and the timing of Easter. Provided there was a genuine intention to let the property and it has been available for letting (despite Covid restrictions preventing holidaymakers from actually booking it) for the requisite 210 day period, the property need only meet the actual letting requirement (point 2 above) once in every three years.
However, there are circumstances, particularly where new FHL businesses are concerned, where the concession doesn’t help. Let’s look at an example.
Sandy and Sunny bought a cottage at Bamburgh in October 2019 with a view to letting it to holidaymakers. After some repairs and redecoration, they furnished the property and marketed it for letting from 1 January 2020. The property was first let for a week from 7 February 2020 but all subsequent bookings were cancelled due to Covid concerns followed by lockdown. The property proved popular in summer 2020 but bookings started to tail off in autumn 2020 and only one week’s letting was achieved in December 2020. After that, there were no more visitors until May 2021.
The first year of letting is from 7 February 2020 to 6 February 2021. During that time, the property was let for a total of 102 days. In the tax year to 5 April 2021, it was let for 95 days. It does not meet the second day count test for either period. The period of grace election doesn’t help because the property did not qualify as an FHL in 2019/20. As a consequence, the business will be taxed for these early years as a regular let property without entitlement to capital allowances and the owners will be stuck with a 50:50 profit share split; tax relief on mortgage interest may also be restricted.
This is very unfortunate and not particularly fair but there is no flexibility in HMRC’s rules on period of grace elections, despite a pandemic which was not envisaged at the time the rules were first introduced.
Will a FHL owner be liable for small business rates or council tax?
Historically, FHL owners elected to pay business rates rather than council tax because “small business rates relief” (SBRR) effectively reduced the business rates bill to nil. From 1 April 2023, the rules in England have been tightened up to delay qualification for business rates and, by extension, SBRR.
From 1 April 2023, a property will only be assessed for business rates if the owner can provide evidence that:
- It will be available for letting commercially, as self-catering accommodation, for short periods totalling at least 140 days in the year from the day of assessment;
- During the previous year it was available for letting commercially, as self-catering accommodation, for short periods totalling at least 140 days; and
- During the previous year, it was actually let for short periods totalling at least 70 days
Therefore, for properties used as holiday lets for the first time, there is a liability to council tax for each day until the property has been available for 140 days and actually let for 70 days. On the day these criteria are met, the property will qualify for a business rates assessment, provided the owner intends to advertise it for 140 days in the coming year.