The pandemic has impacted the UK’s travel and tourism sector heavily; this includes many Furnished Holiday Let (FHL) businesses which were required to shut for a large part of the 2020 holiday season.
Even when businesses could reopen, with stringent cleaning requirements and social distancing regulations, many will have suffered increased costs, longer turnaround times and reduced capacity.
As a result, many properties will have been let for significantly fewer days than usual and FHL businesses may not meet all the criteria to qualify as an FHL in the 2020-21 tax year. This article considers the tax consequences and the options available to owners.
A property will qualify as an FHL if it meets the following criteria:
- The property must be available for commercial letting as holiday accommodation to the general public for 210 days or more per year;
- The property must actually be let commercially as holiday accommodation to members of the public for 105 days or more per year (excluding periods of longer-term occupation, ie continuous periods of more than 31 days), and
- The property must not be let for periods of longer-term occupation for more than 155 days per year.
The above tests generally apply to a tax year, unless it is the first or last year of letting, in which case the criteria must be met for the first 12 months of letting or last 12 months of letting respectively.
If your FHL business has not met the criteria for 2020-21, what are the tax consequences?
The main difference with FHLs when compared to standard residential lettings is that they are treated as a trade for certain tax purposes. This means that FHL businesses can claim plant and machinery allowances on furniture, fixtures and white goods in the property. The profits also qualify as earnings for pension contribution purposes and the finance cost and interest restrictions that apply to residential landlords do not apply to FHL businesses, meaning owners get full tax relief on any mortgage interest. In addition, there are various capital gains tax (CGT) reliefs that might also be available on a future sale or gift of the property.
If your property business no longer qualifies as an FHL, this may give rise to higher income tax liabilities, as plant and machinery allowances previously claimed may be clawed back, mortgage interest relief may be restricted, and tax relief on pension contributions may be withdrawn if you have insufficient ’earnings’. In addition, a sale of the property could give rise to higher CGT liabilities and certain CGT reliefs may no longer be available.
What are my options?
Where the property has not been let for 105 days or more in the year, you can make a ’period of grace’ election, which allows the property to qualify as an FHL by deeming the let days condition to have been met, so long as all other FHL conditions were met for the year.
To make an election, you must be able to demonstrate that there was a genuine intention to let the property in the year. HMRC’s guidance includes cancellations due to unforeseen circumstances, therefore closure due to the Coronavirus lockdown, should qualify. In addition, the property must have met the letting condition in the previous year. The period of grace election can be made for up to two consecutive years, so for both 2020-21 and 2021-22 if necessary, which could be useful if lettings don’t recover quickly. However, if the property does not qualify as an FHL after two consecutive period of grace elections, it will cease to qualify as an FHL thereafter.
The other alternative, where you let more than one FHL, is to make an averaging election. This would be useful where some but not all the properties have met the letting condition, as you elect to apply the letting condition to the average rate of occupancy for all the properties you let as an FHL. However, you can only average properties across a single FHL business, which means that you cannot mix UK and EEA FHL properties together, as these are always treated separately for tax purposes.
It is possible to combine both the period of grace and averaging elections to ensure a property continues to qualify as an FHL.
How to make the election
Both elections can be made on the UK property pages of the self-assessment tax return, or they can be made separately as standalone claims, up to one year after 31 January following the end of the tax year, ie by 31 January 2023 for the 2020-21 tax year.
Net property losses incurred in 2020-21
Due to reduced turnover and increased costs, it is likely that many FHL businesses will have made a net loss for tax purposes in 2020-21. This loss can only be carried forward and offset against future profits from the FHL business. It cannot be offset against other income or other UK property business profits.
Where the FHL did not meet the qualifying criteria for 2020-21 and neither a period of grace nor averaging election is possible, losses incurred in 2020-21 will be treated as UK property business losses, rather than FHL losses. The good news is that these losses can be offset against future FHL profits, providing valuable tax relief when the business recovers.
What if I want to sell my FHL property?
If you are thinking of selling or gifting the property, any gain may benefit from a 10% tax rate (rather than the 18%/28% rate for residential property), if the disposal qualifies for Business Asset Disposal Relief (BADR). In addition, FHLs also potentially qualify for other CGT reliefs such as rollover relief, relief for gifts of business assets and relief for loans to traders.
If you are considering disposing of your FHL property, it is important to check the tax position. If the property has not met the relevant criteria for the various reliefs (for example, for BADR the property must have qualified as a FHL for at least two years) it could result in a much higher tax bill than anticipated.
It is also worth noting that a disposal of an FHL property will need to be reported and any tax paid to HMRC within 30 days of completion.
Delay to Making Tax Digital for income tax
Currently, taxpayers with taxable rental and/or self-employment business income are required to report this on their annual tax return which must be submitted by 31 October (if filed by paper) or 31 January (if filed electronically) after the end of the tax year. Making Tax Digital for Income Tax Self Assessment (MTD ITSA) is the government’s plan to reform this process, introducing a requirement for digital record-keeping and more frequent, in-year reporting to HMRC.
MTD ITSA had been expected to be introduced for affected businesses and landlords from 6 April 2023. However, the government has recently announced a delay to this, with individuals now due to enter the new reporting regime from 6 April 2024 and general partnerships without corporate members from 6 April 2025.
Taxpayers affected by MTD ITSA will be required to maintain digital records using MTD-compliant software for their rental and/or self-employment activities and to submit quarterly reports to HMRC about these activities. Final figures for the business, together with any other income and gains which would currently be included in a self-assessment tax return, will need to be reported digitally by 31 January after the end of the tax year.
Taxpayers with annual combined rental and self-employment business income (ie before expenses) in excess of £10,000 will be affected, therefore this could affect taxpayers with modest income from FHLs or significant other non-FHL income alongside their FHL activities (eg from non-FHL property or a sole trade).
MTD reporting requirements for partnerships will be slightly different from those for individuals, as the partnership will need to report all income and gains, not just business income, quarterly. It has not been confirmed when general partnerships with corporate members, limited partnerships or limited liability partnerships (LLPs) will join MTD ITSA. Trusts, deceased estates, non-resident companies, registered pensions schemes and digitally excluded taxpayers are currently exempted from MTD ITSA.
If your FHL business has been impacted by the pandemic and you are uncertain of the tax treatment or would like to discuss the options available to you, please get in touch with your usual Saffery Champness partner.
Suzanne Wasson, Director