Many of the recent changes in the taxation of buy to let rental businesses do not apply to property businesses that qualify as furnished holiday lettings (FHL). In particular the restriction on deductibility of finance costs that started to apply from 2016/17 does not apply to furnished holiday lettings. It may be worth considering investing in such properties to take advantage of a number of other generous tax breaks.
Tax reliefs that apply to furnished holiday letting businesses
Furnished holiday letting businesses are treated like a trading business for many, but not all tax purposes.
1. Capital allowances are available on furniture and equipment such as cookers, washing machines, beds.
2. Profits count as earned income for pension purposes
3. CGT entrepreneurs’ relief applies on disposal of the holiday rental business
4. Capital gains may be rolled over into FHL property
5. CGT gift holdover relief available on the gift of the rental business.
Note that inheritance tax business property relief does not generally apply on the transfer of FHL property businesses.
What is a furnished holiday letting (FHL) businesses?
There are strict rules for a property rental business to qualify as furnished holiday lettings. The most important conditions are:
1. Property must be situated in the UK or European Economic Area (EEA)
2. Furnished and let on a commercial basis
3. Available for letting for 210 days a year
4. Actually let for 105 days a year
5. Not normally let for more than 31 consecutive days to the same person (i.e. short lets)
6. In other words lettings in excess of 31 days are excluded from the 105 day test as are periods let to family and friends on a non-commercial basis
For individual landlords the 210 day and 105 day tests apply to the tax year or the first 12 months on commencement of the rental business.
If the 105 day test is not met it is possible to make a “pooling” or averaging election where several FHL properties are rented out in the tax year. You can elect to apply the letting condition to the average rate of occupancy for all the properties you let as FHLs. There are separate elections or pools of UK and EEA properties.