Furnished holiday lets (FHLs) have long enjoyed many tax breaks often as both investment properties and a trade. They also benefit from many advantages on offer for commercial properties, though qualifying as a private residential accommodation.
Given their tax status, it’s hardly surprising that they have long been a magnate for investors. While the government has introduced some restrictions to the benefits on offer and made it harder for properties to qualify, the tax advantages are still considerable for those that do:
- They can qualify for Entrepreneur’s relief on CGT (Capital Gains Tax).
- They can get rollover relief on replacement of business assets.
- They can get holdover relief on gifts.
- They can claim capital allowances for fixtures, furniture and fittings in the property.
- They may qualify for exemption from Inheritance Tax, provided certain conditions are met.
- National Insurance should be usually be payable on income.
- They may, if they have been the owner’s main residence at some point, qualify for a private letting relief.
- Any losses on a FHL can be carried forward for set off against its future profits.
For the purpose of offsetting these losses, all of the owner’s FHL properties in the UK will be treated as one single business and elsewhere in the European Economic Area (EEA) will be considered as a separate business.
Not only the holiday properties but the offices from which the business is run can also qualify for most of the above reliefs.
Qualification Criteria for FHLs
- The property must be located in the EEA.
- It must be furnished and let out on a commercial basis; it must not be occupied continuously (specifically, for 31 consecutive days) for at least seven months in a given year (normally a tax year).
- In the same year as mentioned above, the property must be available for commercial lettings for at least 210 days and actually let out commercially for a minimum of 105 days.
Moreover, from 2011/12, FHL owners that met all the criteria mentioned above in the previous tax year, could enjoy all the tax benefits given to FHLs for the next two years despite not meeting the 210 days criteria in those two years, provided they met all the others.
Also, FHL owners who own multiple such properties can use a system of averaging across their properties to meet the 210 days criteria.
However, both these allowances cannot be used together and all properties have to qualify individually before they can claim the two year tax relief.
It’s also worth remembering that where the property is used for purposes other than commercial lettings to holiday makers, any Capital Gains tax relief will be reduced accordingly.
FHL and the EEA
From April 2009, the tax relief program offered to FHLs in the UK was opened up to the entire EEA and moreover, with retrospective effect. This meant that any FHLs operating in the EEA could apply for FHL tax benefits since they first met the qualification criteria, provided their country had joined the EEA by then.
However, those claiming FHL benefits need to keep in mind that they cannot claim benefits such as the 10% wear and tear allowance or the landlord’s energy saving allowance so it’s important to evaluate each property and its situation carefully before making a decision to apply for FHL tax relief.