With less people holidaying overseas the demand for UK holiday lets has soared. They also seem to have taken on a mythical status in the tax world due to some of the more generous ways that the tax system deals with them. So let’s quickly take a look at some of those tax rules to make sure you don’t get caught out.
What is a Furnished Holiday Let (FHL)?
A Furnished Holiday Let on the face of it is exactly what it says on the tin: a furnished property available for short term lets (i.e. holidays) within the European Economic Area (EEA). Therefore, despite the surge in demand for UK holiday homes they can also include property anywhere in the European Economic Area.
The word “Holiday” within the guidance is a bit of a red herring. The stay does not need to be a holiday at all and certainly the property does not need to be somewhere classed as a holiday destination. This has led to more and more people calling FHLs different things. Serviced accommodation is essentially the same thing and the “servicing” referred to is just really a nod to the fact that when you leave the owner would normally arrange for the property to be turned around (cleaned, sheets/towels changed, toilet rolls replenished etc).
Often overlooked of course is the Furnished element. Hopefully it goes without saying that there should be enough furniture and furnishings in the property to allow a holiday maker to basically bring their clothes and toilet bag and not need to bring anything else. There isn’t really a stipulation of the level of comfort needed but of course if it is too sparse you could struggle to meet the letting requirements.
When you delve a little deeper there are further rules to consider
The main condition on qualification as a FHL is based on the availability of the property. It must be available to let for at least 210 days (30 weeks) and let for at least 105 days (15 weeks). Note that there are rules that allow the “averaging” of these days however, so a slow Covid year won’t scupper the treatment so long as the surrounding years were busy enough to cover the drop in demand. No single let should last more than 31 days.
The main advantage is that as opposed to normal residential letting businesses they are viewed as a trade for tax purposes meaning in theory they are taxed at lower rates on sale (as low as 10% instead of 18%/28%) and would also allow a deduction of all loan interest paid on their purchase (whereas normal residential lettings have the interest restricted).
One thing they generally do not get though is any relief from Inheritance Tax. It is possible but the reality is that most simple FHLs will not qualify.
It is also worth noting that the way tax relief is obtained on capital items (in other words the things used within the property like furnishings etc) is different to normal residential lets. Although the method is completely different the end result is often not that much different across the life of the property with the main exception being that FHLs can get relief on all furnishings whereas normal lets only get relief for “replacement of domestic items”. This means that furnishing a normal let first time round does not attract any relief at all.
Finally, for this piece anyway, there is one other key thing to bear in mind with FHLs. That is that they are much more likely to be used by the owner, or people they know, than a normal residential let. This means that a proportion of all costs needs to be disallowed to reflect the personal/family use. The more you use it the bigger the restriction on the costs! It makes sense therefore to specifically block out any time that you want to keep for yourself and ensure that all other times are actively let and shown as available to let. That way it will be easy to demonstrate to HMRC how many weeks or weekends worth of costs should be restricted on your returns.
If you are considering buying or selling a Furnished Holiday Let property and would like advice on the most tax efficient treatment, please feel free to get in touch with our Tax Advisory team here at Robson Laidler who will be happy to help.