Latest Furnished Holiday Lettings Tax Considerations
Furnished holiday lettings (FHLs) have their own government tax treatment (HS253), with specific rules to qualify. Since Covid-19 impacted letting occupancy trade this past year, many Welsh business owners have been reassessing FHL tax implications, including some using the ‘period of grace election’ rule to preserve furnished letting status in the aftermath of lockdowns and travel bans.
The good news is while 2020 was tough, 2021 ‘staycations’ are on the rise recently with many furnished Welsh holiday lets booked way in advance across Pembrokeshire, Ceredigion and Carmarthenshire. Now that travel restrictions have eased and dangers of foreign travel are making UK holidays more attractive – providing UK recovery goes to plan in light of current vaccine rollout and efficacy, all is well.
However there are tax considerations for those recently impacted by low occupancy rates or those running at a loss. Perhaps in addition to this, you are not making the most of the furnished holiday let tax advantages. Not to worry, our team of property tax specialists at LHP is here to help.
What are furnished holiday let (FHL) status conditions?
Property investors can make more money from furnished holiday lets than single lets. They can also save more tax. HMRC considers letting of holiday accommodation to be a trade, where tax treatment is different and advantageous. To be considered a furnished holiday letting, a property must be in the UK or EEA, furnished with enough basic furniture for daily living and let on a commercial basis. A property must also pass these three conditions to qualify as an FHL:
Pattern of occupation: A total of lets of more than 31 continuous days must not exceed 155 days a year to qualify the property as an FHL.
Availability: A property must be available for let for at least 210 days in the year, excluding days you stay there yourself.
Letting: A property must be let commercially as furnished holiday accommodation to the public for at least 105 days a year. Exclude those days you let to friends or relatives at reduced rates plus lets of more than 31 days (unless a guest becomes ill and is unable to leave on time).
For established lets, tests apply to the tax year (for income tax): and to the 12 months of the accounting period (for corporation tax). There are slightly different rules on commencement and cessation. A property ceases to be an FHL if the property is sold, used for continuous private occupation, or letting conditions aren’t met. This negatively impacts you if you are planning to sell in the near future.
What are the tax advantages of an FHL?
We mentioned earlier that property investors can make more money from furnished holiday lets than single let property investments and save more tax. FHLs qualify for the following beneficial exemptions, reliefs and allowances:
- Land Transaction Tax Exemption (3% surcharge) for FHLs.
- Tax relief for pension contributions on the equivalent value of profits made on furnished holiday lets. (Pension contributions are higher on FHLs compared to non-furnished lets).
- Claiming capital allowances for fixtures and fittings such as furniture, equipment, wiring, plumbing and heating installation equipment. Capital allowances can be applied to business profits, reducing tax to pay. Typically, allowances can be 25% of the property cost. You can use a ‘specialist survey report’ to establish claim amounts.
- Section 24 ‘mortgage interest relief cap’ – offsetting all mortgage interest if you meet HS253 conditions. (Buy to let’s allow 0% claim).
- Business asset disposal relief if you sell, you qualify for business asset disposal relief should the gain fall within your £1m lifetime limit. Total chargeable gain is taxed at 10% (not the 18-28% residential property gains rate).
- Other tax relief: FHLs qualify you for capital gains tax relief for traders (business asset rollover relief), relief for gifts of business assets and reliefs for loans to traders).
However, one potential caveat – if taxable turnover exceeds £85,000 in the year ahead, you might need to register for VAT. This has implications on profit margin and forces one to consider upping let fees to cover the 20% turnover loss.
How can a ‘period of grace election’ for pandemic impact help?
If your ‘day count’ to 5 April 2021 falls short of the furnished letting condition, a ‘period of grace election’ could preserve your FHL status. You must still meet the other two conditions. The election is available to those who had ‘genuine, demonstrable, intention to let’, but couldn’t because of, for example, Covid cancellations during lockdowns, or travel bans.
If you’ve more than one furnished holiday let, you may be able to use ‘averaging election’ to similar effect. An averaging election allows the condition of ‘average occupancy’ to be met across all of your holiday lets. For example, if two holiday cottages are owned and both are available for letting for 210 days in a year and one is let for 120 days and another 90 days – they will both qualify as FHLs when an averaging election is made.
If you’re filing your tax return for 2020-2021, you will need to make your election by 31 January 2023. The period of grace election can be made up to one year after 31 January following the end of the previous tax year.
Further information on grace periods and averaging elections is at Gov.UK – HS253.
Managing any FHL trading losses
If your FHL is based in the UK and does make a loss, it may be possible to set loss against FHL profits of later years (carry over). You can’t set losses of one FHL against the profits of another if you have a UK and EEA business. To benefit from these rules, you need to work out the profit or loss from FHLs separately from other rental business.
Our team of property tax specialists here at LHP, is here help you with all of this.
Why not contact us to make the most of your furnished holiday let tax advantages or for advice on any aspect of property finance management? Our LHP tax specialists in offices across South Wales are keen to advise you on these matters. Get in touch for an informal chat by emailing firstname.lastname@example.org or by ringing 01267 237534.