Preserving Furnished Holiday Letting Relief during Covid

22 Dec 2021

Commercial letting of furnished holiday accommodation (referred to as a furnished holiday letting or 'FHL') attracts some valuable tax benefits. If the properties you let qualify as FHLs you can:

  • Claim Capital Gains Tax reliefs for traders (Business Asset Rollover Relief, Business Asset Disposal Relief (BADR), relief for gifts/disposals of business assets and relief for loans to traders)
  • You're entitled to plant and machinery capital allowances for items such as furniture, equipment and fixtures
  • The profits count as earnings for pension purposes

However, to benefit from these rules, you need to work out the profit or loss from your FHLs separately from any other rental business.

Qualifications

To qualify as an FHL property, depends on whether it meets certain qualifications. The property must be:

  • In the UK or in the European Economic Area (EEA) – the EEA includes Iceland, Liechtenstein and Norway
  • Furnished – there must be sufficient furniture provided for normal occupation and your visitors must be entitled to use the furniture
  • Commercially let - if you did not make profit, but let the property out of season to cover costs, the letting will still be treated as commercial

You will need to keep separate records for each FHL business as the losses from one FHL business cannot be used against profits from another. All your FHLs in the UK are taxed as a single UK FHL business and all FHLs in other EEA states are taxed as a single EEA FHL business.

Occupancy conditions

The property can only qualify as a FHL if it passes all 3 occupancy conditions. The three conditions are as follows:

  1. A property must be available to let to the public for at least 210 days in the tax year
  2. A property must be let for at least 105 days
  3. Lettings of more than 31 consecutive days to the same tenant must not exceed 155 days

It is this third test that may put the qualification of your property as an FHL at risk.

Due to the pandemic, many FHL businesses will find that the 105-day test will not be met for 2020/21. Although support measures have helped many FHL businesses there is still no relaxation of this 105-day rule (or any of the other rules) to reflect the past year's extraordinary circumstances. So, many FHL businesses will fail to qualify for the year.

This means that an FHL investor who now decides to sell up will, as well as losing the Income Tax advantages for 2020/21, also forgo any beneficial CGT treatment on disposal, qualifying for the BADR, effective 10% CGT rate. The difference in tax can be up to 18%, which could affect their plans.

However, if the property qualified as an FHL in 2019/20 and fails to qualify for 2020/21 (only because of this 105-day rule) then there is a possibility to make a 'period of grace' election. This depends on there being a 'genuine intention' to meet the rule for 2020/21. The effect of this would be to treat the property as FHL for 2020/21 (and for 2021/22 if the 'genuine intention' continues to be fulfilled), thus preserving the tax benefits.

It is important to note that the election cannot be made if:

  1. The property has not been let at any time in the year
  2. FHL treatment is denied because the 210-day test or the 'longer-term occupation' test has failed

How We Can Help

For more information regarding any issues raised in this Broadcast then as ever, please contact us on 01753 888211 or email info@nhllp.com

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