Are you considering owning a Furnished Holiday Letting (FHL)?
Wondering how you can qualify for significant tax benefits and what the associated rules are?
On this Tax Tip, discover the tax advantages of a Furnished Holiday Letting.
We will cover:
- What a Furnished Holiday Letting is and how to qualify as one
- The tax benefits and how to make best use of them
Understanding Furnished Holiday Letting
- National Insurance Benefits: FHL profits aren’t considered earnings for National Insurance (NI) purposes. This means no NI contributions are levied on profits earned by individuals in this venture. Notably, FHL losses cannot offset other income for Class 4 NIC purposes.
- Capital Gains Tax Reliefs: Thanks to its treatment as a trade, FHL businesses that qualify can access several CGT reliefs that aren’t typically available to regular letting ventures. These include Rollover Relief, Gift Relief, Business Asset Disposal Relief (formerly Entrepreneurs’ Relief), and more.
- Income Tax Considerations: FHL profits are classified as relevant earnings for pension contribution purposes. When the business is jointly owned by spouses or civil partners, the distribution of profits for Income Tax isn’t limited to a default 50:50 split—it can be adjusted according to the owners’ preference.
- Claiming Capital Allowances: You’re entitled to claim capital allowances on all plant and machinery expenditure related to FHL properties. Importantly, the Dwelling house exclusion, which applies to many properties, doesn’t impact FHL claims.
- Relief from Mortgage Interest Restrictions: Unlike other letting businesses, FHL ventures aren’t subject to the restrictions on relief for mortgage interest and other finance costs.
- VAT Considerations: FHL activities fall under VAT regulations when the trader is VAT registered or exceeds VAT registration thresholds.
- Overseas FHL Owners and VAT: Foreign FHL owners without a fixed establishment or business in the UK must register for VAT upon making a taxable supply starting from September 1, 2012. Registration thresholds do not apply to foreign businesses.
- Income Tax Losses: While FHL losses are restricted for Income Tax, they can be carried forward to offset profits from the same UK or European Economic Area (EEA) FHL business.
- Inheritance Tax Relief Possibility: In exceptional cases, an FHL might qualify for Inheritance Tax Business Property Relief (BPR) if substantial additional services are offered alongside property letting.
Qualifying as an FHL
To gain FHL status, your accommodation must meet specific criteria:
- It should be furnished.
- Located in the UK or EEA.
- Available for commercial letting as holiday accommodation for at least 210 days in a 12-month period.
- Let as holiday accommodation for at least 105 days in the same 12-month period.
Navigating the 105-Day Letting Test
It’s important to note that periods of ‘longer term’ occupation exceeding 31 days can’t be counted towards the 105-day letting test.
Additionally, such periods cannot exceed 155 days in total within the relevant 12-month period.
If the 105-day letting test isn’t met, you might explore options like a period of grace election or an averaging election to maintain your FHL status.
Remember, even if a letting business doesn’t meet all FHL qualifying conditions for Income Tax or Corporation Tax, it could still qualify as a business asset for certain CGT reliefs.
Furnished Holiday Letting offers a realm of tax advantages and financial opportunities that can shape your property ventures in rewarding ways.
Income Tax Benefits:
Income from a qualifying FHL is treated as trading income for various purposes.
For pension contributions, FHL profits are considered relevant earnings.
Profits from an FHL business owned jointly by spouses or civil partners can be split however the owners wish, a distinct advantage over the usual 50:50 split for ordinary property businesses.
Unlike regular letting businesses, FHL owners can claim capital allowances on all plant and machinery expenditure, as the dwelling house exclusion doesn’t apply.
There’s no restriction on relief for mortgage interest and other finance costs in FHL businesses.
Capital Gains Tax (CGT) Benefits:
An FHL business qualifies as a trade for CGT purposes.
As such, various reliefs apply:
- Rollover Relief:
No clawback of tax relief if a property no longer qualifies as FHL, as long as initial conditions were met.
- Gift Relief.
- Business Asset Disposal Relief (BADR):
This is available for a disposal of an FHL property or business and its assets following its cessation.
- Relief for loans to traders.
For companies, the Substantial Shareholding Exemption can apply.
The trade status ensures that shares in an FHL business-operating company can qualify for specific reliefs like Gift Relief and BADR.
If an FHL business is operated via a company, it benefits from the following:
Capital allowances can be claimed, with the dwelling house exclusion not applying.
The trade qualifies in connection with a disposal of shares under the Substantial shareholding exemption.
Corporate FHL losses can be offset against future profits of the same FHL business.
FHLs operated by companies qualify for carry-forward loss relief.
For the purposes of loss relief, UK and EEA FHL business losses are treated separately.
Capital Gains Tax (CGT) Considerations
Loss of FHL status may expose property owners to potential CGT liabilities.
Rolling over gains from FHL property into a new FHL property that later loses its FHL status will not trigger a CGT liability upon trade cessation, provided rollover conditions were satisfied.
If the previously FHL-designated property becomes a primary residence before being sold, any resulting gains from the sale will benefit from the final period of deemed occupation rules.
On the owner’s death without a sale, the held-over gain vanishes because assets are revalued at market value.
Married couples or civil partners can potentially swap properties held in their individual names, which have not served as their private residences, for substantial CGT savings.
Business Asset Disposal Relief (BADR)
FHL owners might opt to sell or gift their property before any status changes or contemplate a disposal within three years after losing the FHL status to make the most of CGT BADR.
The value of the property shifted during incorporation can be eligible for BADR if the business meets BADR’s trading requirements and other conditions.
Note that BADR does not apply to goodwill on incorporation.
Incorporating an FHL Business
Transferring an FHL business to a limited company can utilise CGT annual exempt amounts and lock in a gain potentially qualifying for CGT BADR.
Stamp Duty Land Tax (SDLT) might apply to this type of transaction at residential rates.
When an FHL business is incorporated, its valuation might generate goodwill.
Owners can crystallise the gain and possibly withdraw a portion as capital.
However, a new company won’t get Corporation Tax relief under the intangibles regime if there’s a connection for CGT purposes between the person disposing of the business and the company.
The same principle applies if a group company moves an FHL property/business to another group member or between two companies under mutual control.
Transferring to a Family Limited Liability Partnership (LLP)
An FHL can be shifted into an LLP involving family members.
If the owners and partners are interconnected, there won’t be any SDLT.
As you can see, there are many tax advantages in owning an FHL.
Make sure to consult with Tax Expert to take advantage of this opportunity – we can help you take your property business to the next level.
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Kind regards Ilyas