At the Spring Budget 2024 it was announced that the special tax rules for FHLs will be abolished from 6 April 2025. We’re waiting for the government to provide more details about the changes, but for a summary of what we know so far see The Spring Budget for individuals.
A property that qualifies as a furnished holiday letting (FHL) can benefit from various tax reliefs that aren’t generally available to rental property businesses. Here are some of the key factors to consider to make sure your property qualifies.
What is a Furnished Holiday Letting (FHL)?
To qualify as a FHL, a property must be based in the UK or the European Economic Area (EEA), furnished and let on a commercial basis, and the following conditions need to be met:
- The property must be available for letting for 210 days a year.
- It must actually be let for 105 days a year (the let days test).
- The property must not normally be let for periods of more than 31 consecutive days to the same person, but if it is, those let days don’t count towards the number of let days in point two above.
- The total of all lettings which exceed 31 days also can’t exceed 155 days.
There are two elections that can be made to reach the let days test. Where more than one FHL property is let in a year, an averaging election can be made to average the occupancy for all the properties that are let as FHLs. Alternatively, if a property meets the letting condition in some years but not others, a period of grace election can be made.
Averaging election
To see if the let days test is satisfied, the letting of all accommodation by the same individual can be averaged by submitting an election to HM Revenue & Customs (HMRC) by the first anniversary of 31 January following the applicable tax year.
For example, if two holiday cottages are owned and both are available for letting for 210 days in a tax year, and one is let for 120 days but the other is only let for 90 days, they’ll both qualify as FHLs if an averaging election is made.
For this purpose, it’s not possible to average lettings of UK FHLs and EEA FHLs. They’re required to be kept separate.
Period of grace election
This election can be made where a FHL property is let in one year and meets all the qualifying conditions, either on its own or as a result of an averaging election for that year, but doesn’t meet the letting condition in the next or subsequent year. It’s important that the FHL is available for commercial letting, but circumstances mean that the FHL doesn’t meet the let days test.
If the FHL doesn’t reach the lettings days threshold after two consecutive period of grace elections, the property will not qualify as a FHL.
Like the averaging election, the period of grace election must be submitted to HMRC by the first anniversary of 31 January following the applicable tax year.
Advantages of qualifying as a FHL
If a property qualifies as a FHL, there are a number of tax reliefs available for the property.
Income tax
April 2017 introduced rules restricting the amount of income tax relief available for the finance costs of a let property. These restrictions do not apply to FHLs, and so full relief can be obtained for finance costs.
Capital allowances, which reduce the taxable profits of a FHL, are available against the cost of providing furniture and equipment such as cookers, washing machines and beds. Where the property is used for private purposes, the allowances will be restricted to reflect the private use.
Profits from a FHL are treated as earned income for the purposes of pension contributions, which is particularly useful for an individual with limited other earnings.
Capital gains tax
For capital gains tax (CGT) purposes, the following reliefs are available in relation to FHLs:
- Business Asset Disposal Relief (previously known as Entrepreneurs’ relief) – the gain on a disposal of a furnished holiday letting may be charged to capital gains tax at 10%,
- Rollover relief – the gain on another qualifying asset may be rolled into the purchase of a FHL, or the gain on the disposal of a FHL may be rolled into the purchase of another qualifying asset, and
- Business asset gift relief – the gain on the gift of a FHL can be held over for CGT purposes.
The rules regarding the availability of each of these reliefs are complex and they may be restricted if the conditions for each aren’t satisfied. You should get professional advice before the disposal or acquisition of a property to maximise the reliefs available.
Inheritance tax
Following successes in the courts by HMRC, notably the Pawson (2013) and Ross (2017) cases, it had seemed the days in which Business Property Relief (BPR) was available for inheritance tax purposes on FHLs were firmly in the past. HMRC has viewed FHLs as predominantly investment businesses rather than trading businesses and has denied claims for BPR.
However, taxpayers had more confidence following the result in the case of Executors of Joyce Graham (deceased) v HMRC, which was a win for the taxpayer. This case suggests that for a suitably structured FHL business providing services over and above accommodation, BPR may be available. It was noted that a high level of care was ‘lavished’ on the guests in the Graham case, which provided evidence that there was a property business in existence. FHL accommodation can represent a business qualifying for BPR, but the nature and quality of the services provided is what makes the difference to a successful BPR claim.
However, in Cox (executors) v HMRC, this delivers a blow to that confidence as the case was won by HMRC. This was on the basis the additional activities and services provided at the holiday apartments were normal holiday activities (not actually provided by the business) and not enough for it to be treated as a trading business for BPR purposes. This outcome suggests that HMRC would deny BPR unless the services provided are close to that of a hotel. Again, this is a complex area, and you should get professional advice on whether BPR is likely to be available in your particular situation.
Other issues
Losses
Losses are ring-fenced to be set against profits of other FHL profits, with UK FHLs and EEA FHLs being treated as separate businesses.
As a result, if a UK FHL makes a net profit and a separate EEA FHL business a loss, the loss cannot be utilised against the profit. It’s possible, however, to set UK property rental business losses against profits from a UK FHL business and, in turn, for overseas property rental business losses to be offset against EEA FHL business profits.
Stamp Duty Land Tax
If you own, or part own, more than one residential property worth £40,000 or more, a 3% surcharge of Stamp Duty Land Tax (SDLT) will be charged on the purchase of a new property; this includes furnished holiday lettings. This will lead to SDLT being payable at 3% on properties purchased with a value of up to £250,000, and 8% on the next £675,000 (the portion from £250,001 to £925,000).
SDLT would then be payable at 13% on any portion from £925,001 to £1.5 million, with any remaining portion over and above £1.5 million subject to a 15% rate.
VAT
If you’re already a VAT-registered person, or are required to be VAT-registered, VAT will need to be charged on the FHL income.
If VAT hasn’t been charged when it should have been, HMRC will consider the rent to be VAT-inclusive.
How we can help
There are advantages to letting a property as a furnished holiday letting but, as ever, the rules are complex, and you should seek advice for your specific situation before taking any action.
For help with any of the issues raised here, please speak to your usual Saffery contact, or get in touch with Zena Hanks.
This factsheet is based on law and HMRC practice as at 1 November 2023.
Useful Resources:
Gov.UK – Guidance HS253 Furnished Holiday Lettings (2022) Updated 06/04/23
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