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The rules for furnished holiday lets have been in flux for some
years but now, after various false starts, new legislation has been
introduced.
The rules changed in stages, with the final changes taking
place, in most cases, from 5 April 2012.
The basic premise is that individuals or companies that run a
qualifying furnished holiday let (FHL) business can benefit from
various tax breaks. FHLs may be in either the UK or the EEA, but
FHLs in the UK will be treated as comprising a different business
to FHLs in the EEA.
The conditions for furnished holiday lets
The business must be carried on a commercial basis with a view
to profit.
The property must be provided fully furnished.
It must be let for at least 105 days each year.
It must be available for letting for at least 210 days each
year.
Lettings must comprise short term lettings of no more than 31
days.
The property can be let out for periods longer than 31 days in
one stretch but none of the days will count towards qualification.
However if the total of all or any 'longer term occupation'
lets is more than 155 days in the year, the property will no longer
qualify as a furnished holiday letting.
For this purpose the relevant year is usually the tax year, but
will be the first 12 months from the date of first letting and the
final 12 months to the end of the final letting.
Where more than one FHL is owned, the let day requirement can be
averaged between the different properties in the UK. A separate
averaging election can be made for the EEA properties.
Where the let day limit of 105 days is not reached in a year and
every effort has been made to meet it, the owner can elect for a
year's grace. The second of two consecutive years can also be
elected for but only if an election was made for the first
year.
This period of grace must follow a qualifying period.
Advantages of the Furnished Holiday Lettings
regime
There are a number of tax advantages in having a qualifying
FHL:
Capital allowances can be claimed rather than the usually less
generous "wear and tear" allowance. Capital allowances
can be claimed not just on the furnishings, but also on integral
features incorporated in the building, such as wiring and
plumbing.
FHL profits are relevant income for pension purposes.
Entrepreneurs' relief may be available on the sale of the
business, reducing capital gains tax from 18% or 28% to just
10%.
FHLs can be gifted and the gain held over.
The gain on the sale of a FHL can be held over into the
purchase of another qualifying asset, not necessarily a FHL, and
vice versa.
100% business property relief may be available against
inheritance tax.
And some disadvantages
Losses on FHL businesses can only be offset against future
income from the same business. For example, a FHL property might
generate losses, cease to qualify and be kept as a rental property
but the earlier FHL losses would not be available against the
subsequent rental profits.
The losses of an EEA FHL business and a UK FHL business cannot
be set-off against each other, even in the same year.
VAT must be charged if the registration limit (currently
Ł77,000) is exceeded. This includes all business income
earned by the same person, so farmers and consultants might find
they need to charge VAT even though their FHL income was well below
the limit.
Planning points
Where property is owned with a spouse, profits and losses can be
split as agreed between the parties, rather than needing to be
split 50/50.
It may be possible to claim capital allowances on a property
purchased for use as a FHL. Specialist valuers have indicated that
typically, somewhere between 12% and 30% of the purchase price of a
property (excluding land value) could be treated as qualifying
plant and machinery, depending on the property specification.
Interest relief may be available against FHL profits on loans
secured on a main residence and used to buy the property.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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