Furnished holiday lettings (FHLs) are an increasingly popular form of investment in the UK, offering a unique opportunity for property owners to earn income by renting out their properties as holiday accommodation. Unlike other rental properties, FHL benefits from special tax treatment and is subject to different rules.
However, owning and managing an FHL requires careful consideration and management to ensure that the property is successful and profitable. In this article, we will explore the qualifying criteria, and tax benefits of FHLs along with HMRC’s One to Many Letter Campaign.
Qualifying Criteria for Furnished Holiday Lets (FHL)
In addition to being let on a commercial basis with the intention of making a profit, a property must meet the following criteria to qualify as a furnished holiday letting (FHL):
- The property must be furnished to a sufficient standard to allow occupation as a holiday accommodation.
- The property must be in the UK or the European Economic Area (EEA).
- The property must pass all 3 occupancy conditions.
All three occupancy conditions must be satisfied for a property to qualify as a FHL:
The Availability Condition
The property must be available for commercial letting as holiday accommodation to the public for at least 210 days per year.
The Letting Condition
The property must be actually let out as holiday accommodation for at least 105 days per year. This excludes periods where the owner or their family are occupying the property
The Pattern of Occupation Condition
The property must not be let for periods of longer-term occupation (normally 31 days or more) for more than 155 days during the year.
Meeting these criteria is essential for a property to be considered a furnished holiday letting and to receive the associated tax benefits.
Tax on Airbnb Income
Airbnb can qualify as a Furnished Holiday Lets if it meets the aforementioned criterion. You can learn more about Tax Implication on Airbnb in our article Tax on Airbnb Income.
Solutions for Failing to Meet FHL Criteria
If you were unable to meet the FHL Conditions mentioned above, despite having a genuine intention to do so and the reason for the failure was out of your control, then here are two potential solutions for you:
Period of Grace Election
The Period of Grace Election is a solution that allows you to still qualify for FHL status, even if you haven't met the Letting condition of 105 days in a particular tax year. The election can only apply where there is a genuine intention to let the property and the property meets the Availability condition and the Pattern of Occupation condition.
If your property qualifies as a FHL in one tax year, you can choose to treat it as continuing to qualify for up to two years later. However, it's important to note that the grace election must be made in the first tax year in which the letting condition is not met. This election must be made by the anniversary of 31 January following the tax year in which the failure occurs.
In addition, if you don't meet the criteria for Furnished Holiday Let by the fourth year after two consecutive periods of grace, it will no longer qualify as one.
You have a Furnished Holiday Let property, but in the 2022/2023 tax year, you could only let it for 90 days due to unforeseen circumstances. You can make a Period of Grace Election based on the previous years' pattern of occupation and marketing efforts.
You've met the letting condition in the previous two tax years and marketed the property at a similar or greater level.
Making the election allows you to treat the property as a Furnished Holiday Let for the year, despite falling short of the letting condition. You must make the election by 31 January 2024, the anniversary of the tax year in which the failure occurred.
If you have multiple properties that are being used as Furnished Holiday Lets, and one or more of these properties don't meet the letting condition of 105 days, you can make use of an Averaging Election. This election allows you to apply the condition to the average rate of occupancy for all the properties you let as FHLS, instead of looking at each property individually.
Moreover, each of the property must meet the Availability condition and the Pattern of Occupation condition. This election must be made by the anniversary of 31 January following the tax year in which the failure occurs.
You have a Furnished Holiday Let business with three properties, but one property only had 80 days of letting in the 2022/2023 tax year, below the 105-day requirement.
You make an Averaging Election, and the average rate of occupancy for all three properties is 107 days, meeting the requirement. You must make the election by 31 January 2024, the anniversary of the tax year in which the failure occurred.
By making the Averaging Election, you can ensure that all three of your properties continue to qualify as Furnished Holiday Lets, even though one property fell short of the letting condition.
Meeting the FHL criteria can provide you with valuable tax advantages. You can potentially reduce your overall tax burden and take advantage of the unique tax benefits that come with owning an FHL property. Some of such advantages are explained as follows:
Capital Gains Tax Reliefs
If you own properties that qualify as Furnished Holiday Lettings, you may be eligible for certain capital gains tax reliefs that are not available for normal lettings.
Business Asset Disposal Relief (BADR)
If you own FHL property, you can benefit from a capital gains tax relief called Business Asset Disposal Relief. This relief reduces the capital gains tax rate to 10% when selling an FHL property, as opposed to the standard rate of 28% that applies to residential landlords in the higher tax bracket.
Claiming this relief can result in substantial tax savings, with a reduction of up to 18% in taxes payable on the capital gains from the sale of your FHL property.
Owning an FHL property allows you to defer paying Capital Gains Tax (CGT) on the sale of your FHL property. This relief is known as Rollover Relief, and it applies if you use the proceeds from the sale to purchase another property.
Essentially, you can delay paying the tax until you sell the replacement property. As a result, you won't be required to pay any capital gains tax at the present time.
If you decide to give away your FHL property for no consideration or sell it for less than its market value, you may be able to claim Gift Relief, which is also referred to as Holdover Relief.
This relief allows you to defer paying Capital Gains Tax (CGT), and the person who receives the property will be responsible for paying CGT when they eventually sell it. By utilizing this relief, you can delay the payment of tax and potentially reduce the overall amount of tax you owe.
No Restriction on Interest Relief
Section 24, which restricts the interest relief, does not apply to furnished holiday lettings. If you have taken out a loan to buy a furnished holiday let property, you can claim the entire interest paid as an allowance expense and deduct it from the gross rental receipts.
In 2015 Summer Budget (Section 24 of Finance Act 2015), the Government announced proposals to restrict the tax relief available to landlords in respect of interest and other finance costs. Refer our article on ‘Interest Relief Restriction’ to learn more.
One of the key benefits of owning an FHL property is entitlement to Capital Allowances.
Capital Allowances refer to a type of tax relief that enables owners to deduct the cost of specific assets, including furniture, fixtures, and equipment, from their taxable profits.
By claiming the value of the Capital Allowances, you can reduce the taxable profits and ultimately lower your tax liability.
Income generated from Furnished Holiday Lettings is considered as 'Earned Income', similar to other forms of self-employed income. As a result, you can make a greater tax-free contribution to your pension scheme, as the amount you can contribute is dependent on their earnings. This is advantageous as profits from normal letting activities are not treated as earnings for pension purposes.
Did You know:
UK FHL business loss cannot be offset against profits from an ordinary UK property business.
FHL Landlords Targeted : HMRC Sample letter on income from short term property letting.
HM Revenue & Customs (HMRC) has been targeting Furnished Holiday Let landlords with its One to Many (OTM) letter campaign.
The campaign is designed to identify and address any potential tax issues among FHL landlords who may not be declaring all of their income or who may be claiming expenses they are not entitled to.
Under the OTM campaign, HMRC sends letters to FHL landlords notifying them that their tax affairs are under review and asking them to check that they have declared all their rental income and claimed only legitimate expenses.
If you’re an FHL Landlord and have not declared this income on your tax return, you may receive a letter from HMRC as part of the OTM campaign as the one below:
It is advised to take the letters seriously and ensure that their tax affairs are in order to avoid potential penalties and legal action.
In summary, furnished holiday lettings offer property owners a unique and profitable investment avenue in the UK. By understanding the qualifying criteria, managing occupancy conditions, and leveraging the tax benefits, individuals can maximize their returns and create successful FHL businesses.
It is vital to stay informed about HMRC's guidelines and proactively address any issues that may arise to ensure ongoing compliance and long-term success in the FHL sector.