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09 December 2020

Furnished Holiday Lettings – Renting or Trading?

Tax Tips – Business Question:

I own a furnished holiday property which I have been renting out for several years to various third parties.  I have been doing my own tax return and showing this as rental income but I recently became aware that this may not be the most advantageous way of reporting the income?

‘The UK tax code operates a generous regime for furnished holiday accommodation or furnished holiday lettings (FHL),’ says Paddy Harty

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Although appearing on the face of it a stream of rental income which is normally taxed under Schedule A of the UK Tax Code, FHL, if qualifying, is treated by HMRC as a trade which also can extend to an overseas property business which is operated on a similar basis to a UK property business.

There are significant benefits to having rental income classified as FHL income.  Firstly the income qualifies as earned income (as opposed to investment income) and therefore you are eligible to make pension contributions which would reduce your tax bill.  Secondly there will be a certain amount of plant and machinery within your holiday property which can be separated out and made the subject of a capital allowances claim against the rental income, therefore reducing the annual profit.  In addition, full interest relief is available in respect of interest paid and is not restricted as is the case with buy-to-let rental income.  Most significantly, there are very generous capital gains tax reliefs available if you are operating a FHL business including roll over relief and business asset disposal relief.  The latter can potentially reduce your capital gains tax bill on disposal of the property to 10% (from potentially 28%).

With such a substantial difference in the treatment of what appears to be a stream of rental income, HMRC have developed a strict code of what exactly qualifies as a furnished holiday lettings and they have two conditions to be met, namely; the Commercial Letting Condition and the Furnished Holiday Accommodation Condition.  The Commercial Letting Condition requires that the property is let on a commercial basis with the view to the realisation of profit.  If you are therefore showing an annual deficit on your rental account you will fail this condition.

The Furnished Holiday Accommodation Condition classifies the property as an FHL if the person entitled to the use of the accommodation is also entitled to use the furniture in connection with the use of the property and the property is let subject to certain conditions which are:

  • The accommodation must be available for commercial letting to the public generally as holiday accommodation for at least 210 days during a relevant period (usually a year);
  • The property must be actually commercially let as holiday accommodation for at least 105 days of the relevant period; and
  • No person occupies the property for more than 155 days in the relevant period.

With the Covid-19 pandemic there is concern amongst the FHL community that they may fail to meet the above conditions during the current year and HMRC have indicated that it may be possible to make a “period of grace” election where normally the FHL conditions are met but in this exceptional year they are not.

Finally, on a word of caution, because qualifying Furnished Holiday Lettings qualify for generous capital gains tax reliefs as detailed above, people often erroneously assume that they are therefore business property for inheritance tax purposes.  This is not the case and there have been several leading tax cases over the years in relation to this matter where the deceased’s estate includes FHL property and a business property relief claim has been made.  HMRC have won almost all the cases and the one case that they lost is currently being appealed.

It is important therefore when considering inheritance tax planning that an assumption is made that any furnished holiday lettings are fully chargeable to UK inheritance tax.

The advice in this column is specific to the facts surrounding the questions posed.  Neither FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.

Contact Paddy

Paddy Harty / Senior Tax Director

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