This form of letting is short holiday lets as opposed to letting for the residential market. The property can be situated in the UK or in the European Economic Area (EEA). It has some advantages but it has other disadvantages which should also be considered.

The Rules

The tax treatment of Furnished Holiday Lets (FHL) has been advantageous for many years. Provided that certain conditions are met, FHL are treated as a trade. This can be preferable to the tax regime for normal let property in a number of specific areas, as the rules and reliefs for trades are often more generous.

Since April 2011 there will be two types of FHL business; a UK FHL business consisting of properties in the UK and an EEA FHL business consisting of properties in one or more EEA states. FHL losses will only be able to be set against income from the same FHL business.
Also from April 2012 the property must be available for letting for at least 210 days a year (generally the tax year) and actually let for at least 105 days.

Simply letting to family members or friends will not qualify unless they pay a commercial rent.

If you own more than one FHL, you can claim to calculate the 105 limit, based on the average for all properties you own, in order to satisfy the test or upon making an election there is a two years period of grace if you fail the 105 day test.

Advantages

You will be able to take a holiday in your own property, or make it available some of the time to your family or friends. However, care would need to be taken to adjust the level of expenses claimed to reflect this private use.

Generally however the rules for allowable expenditure are more generous.

• Income from this source can be used to calculate entitlement to tax relief on pension contributions.
• Capital allowances on qualifying plant and machinery (including furniture) for use in a FHL are available.
• Capital gains made on the sale of a FHL can be ‘rolled over’ against the cost of buying another similar property (or any other qualifying asset used in a trade) purchased up to a year before or three years after the date of sale.
• If a property is gifted, a claim can be made to ‘hold over’ the gain so that it does not become due until the recipient sells it.
• Capital gains arising on the disposal of FHL businesses are eligible for Entrepreneurs’ Relief. The effect of the relief is to reduce the gains qualifying for relief by an amount which results in an effective CGT rate of 10%. There is a lifetime limit of £10 million of gains that qualify.
• For inheritance tax purposes it may be possible to claim a reduction of up to 100% in the value of the property passing on death or on a chargeable transfer (this is subject to conditions which HMRC impose).

If you own FHL properties as well as other let properties you are required to keep the activities separate for the purposes of calculating income and establishing available reliefs.

Disadvantages

Holiday letting will have higher agent’s fees, advertising costs, and maintenance fees (for example more regular cleaning).
Owning a holiday property may be more time consuming than you think and you may find yourself spending your precious holiday sorting out problems.

Our tax team specialises in helping landlords maximise tax saving opportunities and meet their compliance obligations.

We provide a free, no obligation meeting to look at your individual circumstances and see how we can help you to minimise your tax bill.

Contact Debbie Franklin on 01803 316144 or email This e-mail address is being protected from spambots. You need JavaScript enabled to view it or visit www.peplows.co.uk.