Tax for Furnished Holiday Letting (FHL): Landlords Tax Services can assist with this or any other UK property tax matter
Furnished Holiday Lettings (FHL’s) enjoy some significant benefits not available to owners of ordinary residential lettings, but there are some criteria to satisfy before these benefits are available.
The reason for the different treatment is because a “lettings business” (typically letting one or more properties for six months or longer) is treated more as investment income whereas the treatment of an FHL is more like the treatment of a trading business.
Not all the benefits will be available to non-residents. Very few non-residents will be able to enjoy tax relief on pension contributions. Similarly, if the FHL is the only UK asset of a non-resident, the Business Property Relief for Inheritance Tax may be of limited value. If a non-resident has no income arising other than from his/her FHL, then the ability to offset losses against other income of the same year is of no value.
Benefits of a Furnished Holiday Letting (FHL)
Capital allowances allow the taxpayer to deduct from profits the initial cost of furnishings and equipment, usually in the same year as purchase. Capital allowances are not available in respect of residential property (and therefore there is no allowance for the initial purchase of furnishings or equipment). However, furnishings and equipment bought for an FHL do normally qualify for capital allowances, reducing the tax liability for the year in which they are first purchased.
Business Property Relief would eliminate the Inheritance Tax (IHT) on the underlying assets. In general, an FHL will not qualify for Business Property Relief. However, in a recent case of Grace Joyce Graham dec’d, the Tribunal accepted that there is a complete spectrum of lettings from basic letting at one end to a full hotel at the other. Where along the spectrum the cut-off is to be found has not yet been decided. In the Graham case the Tribunal decided that, because guests had been provided with bicycles, pool, etc., the property did qualify for Business Property Lettings Relief.
Capital Gains Tax
Capital Gains Tax (CGT) applies to the gain in value realised when you dispose of a property. If it has not been your main residence, then there are few reliefs or allowances. When you sell a rental property you can expect CGT of 18% or 28% (mostly 28%), unless it has been an FHL. FHL’s qualify for Entrepreneurs Relief reducing the rate of CGT to 10%.
Because a normal letting is treated more like an investment, the income from it may not be used as relevant income when considering pension contributions. It is not “pensionable income”. Income derived from an FHL is pensionable income and the normal limits for pension contributions apply.
Losses derived from ordinary lettings can only be carried forward to future years to offset profits made in future years. Losses derived from an FHL may normally be offset against other income of the same year.
Tax for Furnished Holiday Letting (FHL): Landlords Tax Services can assist with this or any other UK property tax matter.
Furnished Holiday Letting criteria — all of which must be satisfied
To qualify as an FHL the property must be in the EEA.
To qualify as an FHL the property must be available at least 210 days in the year.
To qualify as an FHL the property must be actually let for 105 days or more on a commercial basis. However, you may claim a year of “grace” if you have one or two years where occupancy does not meet 105 days.
If the total number of days of all the lettings over 31 days is in excess of 155 days, then the property will not be an FHL.