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Furnished holiday let (FHL) property income is treated differently from longer term residential lettings. We set out the top 10 tax areas any FHL owner needs to know.
1. Counting the days – There are minimum letting requirements to meet the FHL criteria. Firstly, a property has to be available to the public for at least 210 days and it actually needs to be let as commercial holiday accommodation for 105 days. Days are usually counted over a tax year apart from in the first and last year of trade.
2. Off-season lets - You can let the property for longer periods (eg extended winter lets) without losing your FHL status provided these longer lets don’t add up to more than 155 days in the year. A longer let is any individual let over 31 days.
3. Period of grace: When the letting requirements were tightened up in 2012, a relief was introduced to allow owners to preserve their FHL status even if they have a poor letting year or experience disasters such as a foot and mouth outbreak or flooding. Provided you qualify in one tax year, you can elect to qualify in the next two.
4. Averaging – owners of more than one property can average the letting days from more popular properties with under occupied ones so the portfolio as a whole can still qualify.
5. Unequal split – Normally rental income is taxed based on the actual ownership of the property. But joint owners of FHL properties can split the profits as they choose for tax purposes, which can help minimise the bill.
6. Losses – A big benefit of the FHL status used to be that losses could be offset against other income. This was brought to an end in April 2011 and now losses can only be set against profits on other FHL properties in the year or carried forwards to the same business.
7. European holidays – Since April 2011 owners of holiday lets in the EEA have formally been allowed to benefit from FHL rules. Your UK and EEA lets are treated as separate businesses though, and losses in one can’t be offset against profits in another.
8. Capital allowances – Unlike normal residential lets, owners of FHLs can get relief for costs of furnishings through the capital allowance system.
9. Capital Gains Tax (CGT) – FHL is deemed to be a trade for certain reliefs such as Entrepreneurs’ Relief and hold over for gifts of business assets. These CGT reliefs can be very beneficial for tax planning.
10. Inheritance tax (IHT) – Whether or not FHLs count as a business for favourable IHT reliefs has always been a grey area. For a while HMRC guidance notes just said ‘refer to technical’. Then along came a case about whether or not a bungalow in Suffolk used as an FHL qualified for IHT relief. HMRC won and relief was denied. Now it’s a very high bar indeed for an FHL owner to clear to claim any form of IHT relief.
Helen Thornley, Tax Consultant
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