What is an FHL?
A Furnished Holiday Let (FHL) is a type of rental property classification in the UK and European Economic Area which provides certain tax advantages where specific requirements are met:
- It must be furnished to a sufficient degree to enable the property to be occupied as holiday accommodation. There are no specific rules on what needs to be provided, but furnishing your property to a self-catering standard is a good benchmark.
- You must actively promote and let the property commercially with the intent of making a profit. Making a profit is not required, it is the intent that is important and this can be evidenced by things such as a business plan, engaging letting agents, charging market value rents, advertising etc.
- Available for letting for a minimum of 210 days in the tax year, this means seasonal closure periods and where the property is unavailable due to refurbishments are ignored.
- Let for 105 days in the tax year on short-term (less than 31 days) lets to unconnected persons i.e. not family.
- Not let for more than a total of 155 days as ‘longer term lets’ (periods of occupancy by the same persons spanning more than 31 consecutive days) during the tax year.
If you don’t meet the occupancy condition during a tax year there are two elections which may be made as long as you have a genuine intention to meet the letting condition:
Averaging election – if you let more than one property as a FHL, and any of those properties does not meet the letting condition in a tax year, you can elect to average the rate of occupancy across any or all FHLs.
Period of grace election – where the property met the occupancy condition in the previous year, you can make a claim to average the number of let days over the two years. If the property fails to meet the occupancy condition for a second consecutive year AND a claim was made in that first year, a further period of grace election is available.
The above claims should be made in your tax return within one year of the normal filing deadline i.e. within the normal time limit for amending a return.
Impact of Coronavirus
HMRC have confirmed that the availability condition is satisfied if the property has been made available for letting as a FHL for at least 210 days in the year, even if Covid restrictions meant that in reality the property could not be used.
Obviously, due to the numerous lockdowns imposing travel restrictions and holiday bans it is more likely that the occupancy condition would not be satisfied. In this circumstance it is possible to make the period of grace election although where the business is in its first year of operation this is not possible. There has been no relaxation in the conditions which must be satisfied therefore property which does not qualify as FHL will need to be reported as normal rental property income.
Benefits of FHL
Capital allowances can be claimed when expenditure is incurred on qualifying capital items installed in an FHL. This can include plant and machinery such as bed, sofas, tables etc, or integral features such as bath and shower units or electrical re-wiring. Relief is only available if the expense has not been claimed using ‘replacement of domestic items’ relief.
Relevant earnings for pensions relief
Tax relief for pension contributions is available on the lower of your relevant earnings or £40,000 (subject to unused prior year allowances and tapering). Income generated from FHLs are classed as relevant earnings.
Business Asset Disposal Relief (BADR)
Capital Gains Tax is charged at 18 or 28% (depending on your total income in the year) on the disposal of residential property. FHLs, however, are treated as a trading business which means that BADR is available. Provided the relevant conditions are met and a claim is made, CGT will be charged at 10%
If a person transfers an asset to a connected person the disposal is deemed to take place at market value irrespective of the price paid. If the asset qualifies and a claim is made, gift relief may be available to pass the value of the chargeable gain onto the recipient such that it is taxed when they sell it.
Rollover relief defers the chargeable gain on the disposal of a FHL when all proceeds are reinvested into another FHL or another qualifying asset.
Relief for Finance Costs
Full tax relief is available for interest expenses incurred on FHLs unlike other rental lettings where from interest relief is now only available as a basic rate tax reducer.
Disadvantages of FHL
Losses may only be carried forward – UK FHL losses can only be set against UK FHL profits and FHL losses from other EEA countries can only be set against profits from other EEA countries. It is not possible to relieve losses against FHL profits in earlier years nor against any other income.
Unlike residential property, income from FHL is not exempt from VAT. Therefore, once your FHL income exceeds the VAT registration threshold (currently £85,000) you will be required to register for and charge VAT to your customers. It should be noted that, the threshold applies to a taxpayer, not to each individual business therefore if you have are self-employed in a non-exempt trade or profession, it is the total turnover for all businesses which is relevant.