Furnished Holiday Lets: Tax Implications

28th September 2023

What is a Furnished Holiday Let (FHL)?

Furnished Holiday Lets (FHLs) are rental properties that meet certain criteria and are treated as a separate rental business. As holiday lets are becoming increasingly popular, it is important to check whether these properties qualify as FHLs.  There are potential benefits and drawbacks to such a characterisation.

The conditions that need to be met in order for a property to qualify as an FHL are as follows:

  • The property must be located within the UK or the European Economic Area.
  • The property must be furnished sufficiently for normal occupation, with the tenant being entitled to use the furniture.
  • The property must be available for commercial letting for at least 210 days in the relevant 12 month period.
  • The property must be commercially let for at least 105 days in the relevant 12 month period.
  • In the relevant 12 month period, if the property is occupied by the same tenant for more than 31 days, these days cannot be counted towards the 105 day condition (unless the longer stay was due to exceptional circumstances). Additionally, if the total of longer term occupations is more than 155 days in the 12 month period, the property will not qualify as an FHL.

The relevant 12 month period is the tax year for continuing FHLs. Otherwise, it is the 12 months from the date of the first letting, or the 12 months up to the date of the last letting.

FHL Elections

Where the above conditions are not met for the relevant 12 month period, there are two potential elections that can be made to still enable the property to qualify as an FHL.

  • Averaging Election – this can be applicable where you have more than one FHL. Where one or more of these properties does not meet the 105 day commercial letting condition, an averaging election can be made to apply this condition to the average number of commercial letting days for each property.
  • Period of Grace Election – where the property does not meet the 105 day commercial letting condition, provided that you can show that you had a genuine intention to meet this condition, the property may still qualify. Under some circumstances this can apply for two years running.

Tax Advantages of an FH

  • Mortgage interest is fully tax deductible – for residential properties that do not qualify as FHLs, the tax relief is restricted to 20% of the cost, meaning higher and additional rate taxpayers do not receive full tax relief.
  • Income tax relief is available on capital expenditure incurred on furniture, furnishings, fixtures and equipment used in the property – this can be claimed in the form of capital allowances, a claim for which is made on your tax return in the year the expenditure is incurred..
  • Profits from an FHL are treated as “relevant earnings” for pension purposes. The amount you can contribute to a pension in a tax year, and receive tax relief on, is restricted to your net relevant earnings. Profits from an ordinary rental are not treated as relevant earnings.
  • Where FHL properties are owned jointly between spouses, the profit does not need to be allocated according to the actual beneficial ownership of the property, which is not the case with ordinary rentals.
  • Various capital gains tax (CGT) reliefs are available, including Business Asset Disposal Relief (BADR) where conditions are met; this would allow the gain to be taxed at 10% rather than at 18%/28%.. Holdover Relief may be available on gifting an FHL which means no CGT on the deemed market value of the gift.

VAT on FHLs – VAT Threshold and VAT Recovery

FHL income is considered as business income and potentially causes a VAT registration requirement. The VAT threshold is currently £85,000 in a rolling 12 months, and FHL income contributes towards that threshold. The VAT threshold takes into account all business activities undertaken by the taxpayer. This is particularly relevant for sole traders, partners, and those that operate several FHLs who may find VAT becomes chargeable on multiple income sources.

If VAT registered, standard rate VAT (which is currently 20%) would need to be charged on the FHL income, usually at a cost to the owners. The VAT suffered on FHL expenses would be reclaimable.

FHL Losses – Loss Offset/Relief

Losses arising on an FHL business cannot be offset against the profit arising from an ordinary rental business. Losses arising on an ordinary rental business can, however, be offset against the profit arising from an FHL business.

Losses arising from an FHL business are carried forward to offset against future income received from the same FHL business.

If you have any queries on furnished holiday lets, please do not hesitate to get in touch with your usual contact at Thompson Jenner and we will be happy to advise further.

Related Contacts

Nicola Squire

Nicola Squire Personal Tax Manager

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