Cornwall, and we expect many holiday locations, are seeing an increase in landlords switching from domestic letting to holiday lets. Aside from the increased rents they can obtain, should they be successful in making this transition, there are tax as well as commercial advantages.
It all comes down to occupancy.
What are the tax advantages?
There are a number of tax incentives if you own and let a furnished holiday lets property (FHL). They include:
- Claiming Capital Gains Tax reliefs for traders (Business Asset Rollover Relief, Business Asset Disposal Relief, relief for gifts of business assets and relief for loans to traders),
- Entitlement to claim capital allowance deductions for items such as furniture, equipment and fixtures, and
- Profits earned from holiday lets count as earnings for pension purposes.
HMRC consider FHL activity as a business. However, to qualify as an FHL landlords need to meet certain occupancy and other rules.
What are these rules?
There are a number of tax incentives if you own and let a furnished holiday lets property (FHL). They include:
They include:
- The property must be in the UK or in the European Economic Area (EEA) – the EEA includes Iceland, Liechtenstein and Norway.
- The property must be furnished. This means that there must be sufficient furniture provided for normal occupation and your visitors must be entitled to use the furniture provided.
- The property must be commercially let (you must intend to make a profit). If you let the property out of season to cover costs, but did not make a profit, the letting will still be treated as commercial.
- All your FHLs in the UK are taxed as a single UK FHL business and all FHLs in other EEA states are taxed as a single EEA FHL business. You will need to keep separate records for each FHL business because the losses from one FHL business cannot be used against profits of the other.
As well as these restrictions, FHL property will need to meet strict occupancy rules.
Occupancy
To secure the FHL tax benefits landlords will need to let FHL properties for a certain, minimum number of days each year. The occupancy rules, set on a tax year basis, are:
- Your property must be available for letting as furnished holiday accommodation letting for at least 210 days in the year.
- You must let the property commercially as furnished holiday accommodation to the public for at least 105 days in the year.
Days when the property is let to friends or relatives of the landlord at zero or reduced rates do not count towards these occupancy rules as this would not be considered a commercial let.
Longer-term lets of more than 31 days are likewise excluded unless the 31 days is exceeded because something unforeseen happens. For example, if the holidaymaker either: falls ill or has an accident and cannot leave on time or has to extend their holiday due to a delayed flight.
If you do not let your property for at least 105 days, there are two options (known as elections) that can help you reach the occupancy threshold if certain criteria apply.
Increased admin
FHL landlords will need to maintain fairly detailed booking records to provide evidence that they are meeting the various occupancy rules. There will also be additional housekeeping costs and chores to deal with the increased throughput of tenants.
However, aside from the tax advantages and these chores, the potential FHL rental income should be higher than from longer term domestic lettings.
Need more advice or information
If you need more advice or details on how to switch to FHL status, pick up the phone, we would be delighted to help.
Source: DocSafe
