Are furnished holiday lets treated differently to standard let property?

If you intend to let a property out as holiday accommodation, you may be able to treat your property as a furnished holiday let (FHL) instead of a normal let.

To begin with, it is important to be aware that very specific criteria apply for a property to qualify as an FHL.

Qualifying conditions for a furnished holiday let

In order for a furnished residential property to qualify as an FHL is must be let on a ‘commercial basis’ with a view to a making profit and it must meet certain tests with regard to days of availability and occupation.

From April 2013, the following availability and occupation criteria generally apply:

• The property must be available for commercial holiday letting for 210 days;
• It must actually be let as commercial holiday accommodation for 105 days;
• Not more than 155 days fall during periods of longer-term occupation

If the property qualifies as an FHL in one tax year but doesn’t meet the above letting condition in the following tax year, an election can be made to treat the let as an FHL in the second tax year provided there was a genuine intention to meet the letting condition. An election could also potentially be made in the third year also.

The property must be furnished and be situated in the UK or a state in the European Economic Area (EEA).

On the basis the above criteria are met, the property will qualify as an FHL.

Two of the key tax advantages of FHLs compared to normal let properties are that FHLs get full relief for mortgage interest payments and can possibly qualify for a 10% tax rate on disposal – subject to a number of criteria being met.

Mortgage interest advantage of a furnished holiday let

Under current rules for residential landlords of non-FHL properties, instead of being able to deduct interest finance costs from rental profits, relief is instead given by way of a ‘tax reducer’ at the basic rate of income tax of 20%. By denying the ability of taking out borrowing costs from the profit calculation and instead only allowing a basic rate relief, landlords who pay tax at the higher or additional rates only get partial relief and are disadvantaged from a tax perspective.

For an FHL, no such restriction applies and they may take a full deduction from their rental profits of any interest borrowing costs they incur.

Capital taxes

A disposal of an FHL generally is generally eligible for Business Asset Disposal Relief (BADR). Provided a number of qualifying criteria are met, the sale of an FHL could attract a CGT rate on disposal of as little as 10% on any gain. A disposal of general let property, such as a standard let residential property does not qualify for BADR and can attract a much higher CGT rate of tax on any gain on disposal.

A summary of the advantages and disadvantages can be found below:

Advantages of furnished holiday lets

• Full tax relief is available for interest expenses incurred for FHLs unlike other rental lettings.
• Capital allowances can be claimed on both integral features and furniture items.
• The ability to claim certain capital gains reliefs that normal lettings do not. These reliefs include rollover relief, gift holdover relief and BADR.
• Profits from a FHL are treated as “relevant earnings” for pension contribution purposes unlike other rental or investment income.
• You will be able to take a holiday in your own property, or make it available some of the time to your family or friends. However, care would need to be taken to adjust the level of expenses claimed to reflect this private use.

Disadvantages of furnished holiday lets

• Holiday letting may have higher agents’ fees, advertising costs, and maintenance fees (for example more regular cleaning).
• Owning a holiday property may be more time consuming than you think and you may find yourself spending your precious holiday sorting out problems.
• FHL businesses are within the scope of VAT so care needs to be taken where the owner of the FHL business is close to the VAT threshold or already VAT registered.

How TaxAssist Accountants can help

TaxAssist Accountants offer a comprehensive range of services to landlords, property investors and developers. If you need investment, legal or mortgage advice, we also have a range of expert providers that we would be happy to refer you to. Call us today on 01943 466066 or fill out our online enquiry form to arrange a free initial consultation.

Date published 14 Jul 2022

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.