Being based in the heart of the beautiful Peak District National Park a large proportion of my clients are involved in the business of Furnished Holiday Letting (FHL).
Special tax rules apply to FHL. They are generally advantageous so care must be taken to follow them correctly.
Rental income from a FHL is treated as trading income. Capital allowances on furniture and kitchen equipment can be claimed. Normal (non FHL) property income tax rules allow only for capital expenditure incurred on replacing furnishings. So right from the start you need to make sure that your business will qualify as a FHL and comply with the letting rules, which are:
- The FHL property must be available for commercial holiday letting to the public for at least 210 days per year AND be actually let as holiday accommodation for 105 days per year.
- It must not normally be let for a continuous period of more than 31 days to the same tenant in seven months of the year.
There are two ways to help owners of FHLs to reach the above thresholds. If an owner owns more than one FHL the ‘averaging’ election might be helpful and if a FHL meets the thresholds in some years but not in others, then a ‘period of grace’ election is currently available.
- Revenue expenditure incurred in the pre-letting period, such as advertising costs or repairs can be deducted against rental income received during the first tax year.
- Expenditure incurred in renovating a property so that it is brought into a condition fit for letting are treated as capital costs.
Capital gains tax advantages of FHL
You need to plan to minimise the capital gain on the subsequent sale of the FHL. This will involve consideration of ownership. Should this be as an individual, jointly with your spouse / partner or through a company? This consideration will depend upon your personal tax situation and your plans for the future (including pensions).
Qualifying FHL properties continue to be treated favourably for CGT. FHLs are classified as ‘business’ assets and are therefore eligible for the following CGT business reliefs:
- Entrepreneurs’ Relief - resulting in a CGT reduced rate of 10% payable on any capital gains arising on the disposal of the property (up to a lifetime limit of £10 million)
- Gift Relief - which means that where a property is gifted the capital gain arising can be frozen and will only become liable to CGT on a subsequent disposal by the recipient.
- Replacement of Business Asset Relief - which allows a capital gain arising on the disposal of a FHL to be deferred by setting it against the cost of a replacement business asset acquired within three years of the disposal.
VAT position of FHL
- The rental income from a FHL is regarded as taxable turnover for VAT which means that if an owner is already registered for VAT then they must also charge 20% VAT on the FHL rentals payable by tenants.
- Where the rents from a FHL taken together with turnover from an unregistered business exceed £85,000 in a 12 month period, then that person should register for VAT.
So before you buy your property or if you have already bought it, why don't you book in a free one hour consultation to discuss your tax planning.