In recent years, the concept of holiday homes and short-term letting has grown in popularity due to platforms such as Airbnb and home to go. It has enabled a significant number of landlords to increase the rental yield on their properties. This has undoubtedly not gone unnoticed by the vigilant eyes of Her Majestys Revenue and Customs (HMRC). As a result, the government has implemented numerous tax changes that have impacted landlords rental income.
This blog will help you understand the concept of the furnished holiday lettings (FHL), how your property can qualify and what steps you need to take if you fail to qualify the conditions.
- What is a Furnished Holiday Let (FHL), and how you can qualify for it?
- What if I am unable to meet 105 days letting requirement ?
- Using both averaging and period of grace
- Benefits of FHL
- Drawbacks of FHL
What is a Furnished Holiday Let (FHL), and how you can qualify for it?
Furnished holiday lets are a distinct category of buildings apart from residential and commercial properties. Once a property is designated as FHL, it qualifies as a trading business and is subject to certain tax benefits. A property must meet specific criteria in order to be classified as an FHL, including availability, actual bookings, and level of furnishings.
In order to qualify as an FHL, a property must meet the following conditions:
Furnished in the United Kingdom or the European Economic Area (EEA)– The EEA includes Iceland, Liechtenstein, and Norway – there must be sufficient furniture for normal occupation, and your visitors must be permitted to use the furniture.
Intention to make profits- When determining the FHL status of a property, it is the intent that is most important. You should be able to demonstrate that you are renting the property to your customers on a commercial basis for short periods and receiving money as rent from them. If you rented out the property during the off-season to cover costs but did not earn a profit, the letting will still be considered commercial.
Note - All of your FHLs located in the United Kingdom are taxed as a single UK FHL business, and all of your FHLs located in other EEA states are taxed as a single EEA FHL business. Therefore, you will need to maintain separate records for each FHL business, as losses from one cannot be offset from the profits from another.
Occupancy conditions- A facility qualifies as an FHL only if it meets all three occupancy conditions –
Availability condition– Your property must be available for at least 210 days (30 weeks) per year for commercial holidays to guests and tourists.
The pattern of occupation condition- If your property is rented to the same person for more than 31 days, this type of long term occupation should not exceed 155 days in a tax year, or it will fail to qualify as FHL.
Letting condition- Your property must be rented out to the public as holiday accommodation for a minimum of 105 days (15 weeks) out of the 210 days you make it available for. The days when you leave the property at zero or reduced rates to friends or family will not be counted.
Long-term lets of more than 31 days are not counted unless the 31-day limit is exceeded due to an unforeseen event like illness or accident.
The above conditions have to be met strictly for the tax year (6 April-5 April) for properties that are already let out, and for new lettings, the tests need to be applied in the first 12 months from when the rental activity begins.
What if I am unable to meet 105 days letting requirement ?
If you do not rent your property for a period of at least 105 days, you have two options (referred to as elections) to help you meet the occupancy requirement:
The Averaging election– If you let more than one property as an FHL and one or more of them do not meet the 105 days letting requirement, you can elect to apply the letting condition at the average occupancy rate of all properties you let as an FHL. This is known as an averaging election.
For example – Steve lets 4 cottages in the UK for the following number of days from 2020 to 2021 –
Cottage Number of days 1 112 days 2 125 days 3 71 days 4 120 days Total 428 days
As we know that cottage 3 does not meet the 105 days letting requirement, Steve uses the average occupancy rate by dividing 428 days (112+125+71+120) by the number of cottages, i.e. 4 (428/4 = 107), and thus meets the condition of 105 days.
Note – You can only compute an average for properties within a single FHL business. Therefore, it is not possible to mix UK and EEA FHL properties together.
You will need to make an election for the averaging to apply within one year of 31 January after the end of the tax year. For instance, in case you are filing your tax return for the tax years 2020 to 2021, you must make an election by 31 January 2023.
Period of grace election– A period of grace election enables you to continue qualifying as a Furnished Holiday Let even if you do not achieve the 105-day letting requirement in that particular year, depending on your pattern of occupation and availability in past years.
You are entitled to make a period of grace election if your property met the required occupancy and availability levels in the previous year, and you can demonstrate that you intended to let out the property commercially in that year by marketing it in the same or a more aggressive manner than in comparison to previous years. Additionally, you may be able to elect if your bookings were cancelled due to unforeseeable circumstances, such as COVID-19. Once a property qualifies as a Furnished Holiday Let in a given tax year, you can elect to continue to treat it as such for up to two additional years. The grace election must be made in the first tax year in which the letting requirement is not satisfied.
If your property fails to meet the letting standards for the third consecutive year, you will be unable to make another election, and your property will cease to qualify as a Furnished Holiday Let. We would recommend seeking professional assistance if this is your first year of letting.
Using both averaging and period of grace
If you own multiple properties, you can utilise both averaging and period of grace elections to ensure that a property maintains its FHL status.
For example – Amanda owns 4 cottages that she rents out as furnished holiday lettings. As shown in the table below, after 2 years, cottage 4 unable to qualify for the letting condition in year 3 and 4.
|Cottages||Year 1||Year 2||Year 3||Year 4|
|Cottage 4||Qualifies||Averaging||Period of grace||Period of grace|
From the above table, it is clear that Amanda employs averaging election in year two and period of grace in years three and four to ensure that cottage 3 remains eligible throughout the entire period.
Benefits of FHL
There are many advantages in classifying property as an FHL:
Finance cost restriction (section 24):Unlike general residential property business, the mortgage interest or other finance costs are fully deductible in computing profits from an FHL business.
Capital Allowances:FHL’s qualify for capital allowance claims, and therefore, the cost of your furniture and other fixture and fittings can be offset against your profits to reduce overall tax liability.
Business Asset Disposal Relief (BADR):If you sell your FHL, the business will be eligible for the Capital Gains Tax relief – ‘BADR’, where the gains will be subject to 10% tax as opposed to the 18% or 28% that applies to other residential lets.
Pension Contributions:As FHL is considered a trading activity, the earnings from it are as classed as ‘relevant earning’. Therefore, you can make pension contributions to reduce overall tax liability.
Drawbacks of FHL
Before deciding to convert your property to an FHL, you must also consider its disadvantages.
Administration:Running an FHL will have more work, as you will need to monitor the number of days it has been let to meet the letting condition. Further time may be spent in finding suitable tenants and advertising costs.
VAT:Residential lets are exempt from VAT, but since FHL is considered as holiday accommodation, you will be required to register for VAT if the turnover breaches the current VAT threshold of £85,000. This will also mean that you can claim back VAT on the expenses incurred for your FHL business.
Losses:Similar to other rental businesses, the losses from FHL can only be offset against future profits from the same business. Also, you cannot offset the losses of your UK FHL business from EEA FHL business, as they will be regarded as separate businesses.
Business Rates:The property may attract business rates as opposed to council tax if let out for more than 140 days a year.
In case you have a query or want assistance and specialist advice from our property tax experts on "Furnished Holiday Lettings”, kindly call us on 03330886686, or send us an e-mail at firstname.lastname@example.org