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The holiday season is now in full swing – and we’ve even had some sunshine! If you own a holiday let property how is your diary looking? I ask because for some underutilized furnished holiday let (FHL) properties, changes to rules from 2012 could start to bite from the current 2014-15 tax year. Now is a good time to review if you think you’ll keep your FHL status this year and decide if you need to take action.
What is a FHL? An FHL is what it says in the name, a fully furnished property generally let out on short term lets to holiday-makers. However for tax purposes there are a number of other requirements. The main ones are that the property also has to be available to let - and actually let – as a holiday cottage for certain minimum periods. If the property is let on longer term lets in the off season there are also limits on this usage.
Why does this matter? A qualifying FHL is subject to different tax rules to normal, residential lettings and there are a number of benefits. Owners of FHL properties are treated for Capital Gains Tax purposes as owning a trading asset so can potentially benefit from Entrepreneurs’ Relief and 10% tax rates on disposal, and tax relief on gifts or sale and reinvestment in further business property. For income tax purposes there is more flexibility on how profits are shared between joint owners which can help reduce tax bills. Capital allowances are also available on furnishings in the property.
What are the changes? Up until 2011-12 the minimum period you actually needed to let an FHL was 70 days (10 weeks) in a tax year. From 2012-13 this was increased to 105 days (15 weeks).
Properties outside the ‘honey pot’ areas of central lakes can struggle to meet the stricter targets and therefore risk falling out of the FHL rules and losing the tax benefits.
Why is this only affecting me now? The 2012 changes included a ‘period of grace’ where a property could continue to qualify as an FHL provided it qualified in one of the two previous tax years. So if you qualified under the more relaxed rules in 2011-12 you could elect to keep your FHL status in both 2012-13 and 2013-14 regardless of actual letting days. This gave time for owners to try and build up lettings.
However, if you didn’t hit the 105 day letting requirement in 2012-13 or 2013-14, you will have to hit it in 2014-15 or risk losing your FHL status.
What about multiple properties? For owners with more than one holiday property there is a second option for hitting the minimum letting periods as you are allowed to average the letting days over two or more properties.
With the potential for lettings over the next few weeks, now is a good time to review the position while you can still do something about it, rather than finding out next April when it will be too late.
Helen Thornley, Tax Consultant
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