The tax advantages of classing your property as a Furnished Holiday Let

As a result of the changes to tax relief on interest payments for buy to let properties, many landlords look for ways to improve the tax efficiency of their investments. Those whose rental properties are in areas with a demand for holiday accommodation may find that a furnished Holiday Let is a more tax efficient alternative to buy-to-let properties.

But how do you know if your property is a Furnished Holiday Let (FHL)? An FHL is a separate category of buildings that stands apart from residential and commercial properties as HMRC deems FHLs as a trade. If a property qualifies as FHL, it attracts certain taxes and enjoys several tax benefits. Following are the criteria that must be fulfilled for a property to qualify as FHL.

To qualify as a FHL the property must be:

• in the UK or in the European Economic Area
• furnished there must be enough furniture provided for normal occupation and visitors must be entitled to use it
• meet the occupancy tests (see below)

The property must be commercially let (i.e. you must intend to make a profit) and, if you let the property out of season to cover costs but didn’t make a profit, the letting will still be treated as commercial.

There are three occupancy tests and all three need to be met for a property to qualify as an FHL. For a continuing let, apply the tests to the tax year – 6th April to 5th April the following year. For a new let, apply the tests to the first 12 months from when the letting began and again for the 12 months up to when the letting finished.

How to know know if a property is a Furnished Holiday Let

1. The pattern of occupation condition
If the total of all lettings that exceed 31 continuous days is more than 155 days during the year, this condition isn’t met so your property won’t be a FHL for that year.

2. The Availability Condition
Your property must be available for letting as furnished holiday accommodation letting for at least 210 days in the year.

3. The Letting condition
You must let the property commercially as furnished holiday accommodation to the public for at least 105 days in the year.

The advantages of a Furnished Holiday Let

Furnishing your property can be tax redeemable
Capital allowances can be claimed on your FHL property. This means the cost of furnishing your cottage to a luxury standard (and in return, increasing your potential rental income) can be deducted from your pre-tax profits. This isn’t an option available for long-term rental properties.

Make pension contributions
Income generated from an FHL property is classed as ‘relevant earnings’ – this means you can make tax-advantaged pension contributions.

When you sell your property
If you should come to sell your FHL property, you are able to claim certain Capital Gains Tax (CGT) reliefs. These are unavailable to long-term rental properties and include:

• Entrepreneur’s Relief
• Roll-over Relief
• Hold-over relief

Split the profits between your husband/wife
With long-term rental properties, profits would be distributed according to the official ownership split (e.g. If you owned 50% of the property, you would share 50% of the profits). With an FHL property, you can portion the profit to everyone’s beneficial interest in the property or by reference to the actual work done in letting the property, where there is sufficient evidence to support this.

Mortgage Interest Relief
The biggest bonus of all is that mortgage interest is fully deductible. Unlike other residential property letting, which currently has a restriction against how much you can claim relief for.

Disadvantages of a furnished holiday let

VAT
Like all holiday accommodation, if the turnover from your FHL property portfolio exceeds the VAT threshold (currently £85,000), you will need to become VAT-registered.

Losses
Losses from an FHL or other property businesses cannot be offset against other income, instead these losses are carried forward and offset against future profits. These losses can accumulate and be carried across multiple years.

Work involved
There is more day-to-day work involved with these as you must monitor the days that is let for, ensure you advertise and fill it for the required days. This takes a lot of time and effort.

How TaxAssist Accountants can help

We are available right now to help you understand if your property qualifies as an Furnished Holiday Let and to help you understand your tax position in relation to this. So, get in touch for a free no obligation meeting. Call us today on 0141 632 1863 or complete our online form to make that first step.

Last updated: 1st August 2023