Furnished Holiday Lettings Rules

For your holiday home to be considered a Furnished Holiday Letting for UK tax purposes you must make sure your property qualifies as a furnished holiday letting, it must be:

• in the UK or EEA (see more in the section ‘If the property is in the European Economic Area’)
• furnished
• available for commercial letting to the public, as holiday accommodation, for at least 140 days a year
• commercially let as holiday accommodation for at least 70 days a year (the rent must be charged at market rate – not at cheap rates to friends and family)
• a short term letting of no more than 31 days – see more below

Lets to the same person
You can let to the same person more than once as long as each let is less than 31 days. All of these lets together can total more than 31 days and still count as furnished holiday lettings.

Lets for periods longer than 31 days
You can let the property out for periods longer than 31 days in one stretch but none of the days will count towards your qualification. This is known as ‘longer term occupation’. However if the total of all or any ‘longer term occupation’ lets is more than 155 days in the tax year, your property will no longer qualify as a furnished holiday letting.

If your property doesn’t qualify
If your property doesn’t qualify as a furnished holiday letting, you will be taxed under the residential property lettings rules.

Changes to the rules
Ad detailed at the last budget the coalition government is proposing a shift in FHL rules rather than the repeal of them, as threatened by the previous government. The proposed revisions lean towards better supporting full time, long term holiday lettings businesses, but in the same vein encourage those who work in the holiday lettings marketplace on a part time basis to increase their stake in the market in order to benefit from the reliefs.

What are the proposed changes?
The changes mostly focus on increasing the eligibility criteria for FHL reliefs, which includes:

• Your home must be available to let for 210 days a year increased from 140
• Your home must actually be let for 105 days increased from 70
• The use of loss relief will be restricted to only enable you to offset losses from your holiday lettings business against certain income from the same business

On 9 December 2010, The Coalition took a unique step in publishing draft clauses from the proposed 2011 Finance Bill. Within these clauses were the outcomes of the Furnished Holiday Lettings Consultation that took place during the summer months of 2010. This document also outlines the treatment of holiday lets for the purposes of tax going forwards (see the Government response at the end of chapter four). Perhaps most surprisingly, but also very generously, the changes will be applied in two stages

Proposed changes to be applied from April 2011

To restrict the use of loss relief from Furnished Holiday Lettings (FHLs).
When the proposed changes are made, holiday home trading losses will only be able to be offset against future profits from the same business. Under the existing rules, owners can offset trading losses from a holiday home against any other sources of income. For a profitable holiday let business loss relief is not a huge concern, however for new entrants and farmers who currently offset losses against farm or other income it could be.

A “period of grace” will be introduced to allow businesses that don’t continue to meet the actual let period for one/two years to elect to qualify throughout that period. This will essentially help those that struggle to meet eligibility criteria year on year, allowing them time to get back on track and supporting their ambitions to be a thriving holiday let business.

Proposed changes to be applied from April 2012

To raise the eligibility thresholds.
To qualify for FHL tax breaks owners must let a property for an annual minimum of 105 days/15 weeks (raised from 10 weeks) and the property must also be available to let for an annual minimum of 210 days/30 weeks (instead of 20). This will allow new entrants to the holiday home industry, and those currently struggling to meet the criteria, a significant amount of time to focus their marketing, in order to increase their occupancy.

If you have any concerns over tax related matters, we advise you consult an independent financial advisor.

What are the tax implications of Furnished Holiday Lettings in the UK?

Tax implications of Furnished Holiday Lettings

To work out your taxable profit you deduct your allowable expenses from your gross rental income. These include:

• Letting agent/Management agent fees (where applicable) – Gael Holiday Homes, Gael Property Care
• Legal and accountant fees
• Holiday Home insurance – we recommend Lyon Insurance services – Quote GAE1001 to receive a 10% discount off your Aviva Sleepeasy premium
• Interest payments on borrowings
• Maintenence and repair costs (but not improvements)
• Utility bills
• Council Tax (if applicable – your property may qualify for non-domestic rates)
• Additional services paid for, such as spring cleaning or gardening
• Costs related to letting the property, such as phone calls, advertising and stationery

You then deduct capital allowances for the cost of each item of furniture or plant/machinery you provide in the property. The amount you can claim does vary from year to year depending on government policy – so always check before making a claim. But for the tax year 2010/11 you may be able to claim up to 100 per cent of the first £100,000 of expenditure. You can then claim 18 per cent of what’s left each year after the initial year of purchase.

You may also be able to claim up to 25 per cent or more of the original purchase price of the property for the integral features built into the property, and this is in addition to the capital allowances for furniture and other equipment.

You may be able to claim 100 per cent for some environmentally friendly purchases. More details can be obtained from the tax authorities.

Alternatively, you can claim a renewals allowance. This covers the cost of replacing furniture or equipment. To calculate this you deduct from the cost of the new item:

• The amount you sold the original item for (if anything)
• Anything extra you paid for a replacement

Once you make a choice as to which kind of allowance you will use, you must stick to this decision in following years.

Declaring rental income and expenses
You need to declare rental income using the land and property pages of your Self Assessment tax return.

• To complete the pages you need to keep the following paperwork:
• A note of all rent received and dates the property is rented out
• Sales receipts, invoices and bank statements
• A record of business expenses (these are explained in the land and property pages help notes)

All these records will need to be kept for six years after the tax year concerned.

If you make a loss
If you make a loss on your earnings from the property, you can offset this against any other income you may have. This will reduce your overall tax bill.
If you prefer, you can carry the loss forward and offset it against future lettings profits. More information on offsetting your losses can be found in the help notes in the land and property pages of your Self Assessment tax return.

CGT and your Furnished Holiday Letting
If you come to sell your property used for Furnished Holiday Lettings in the UK, you may benefit from certain Capital Gains Tax (CGT) reliefs. You may be able to benefit from business asset roll-over relief when you sell your holiday home. For example, if you reinvest in another UK holiday letting property that costs the same as, or more than, the original property within three years of selling, you may be able to defer paying CGT until you sell the new property.
You may also benefit from Entrepreneurs’ Relief when selling your holiday let as it is treated as a business asset. This means you benefit from the business rate of CGT, which equates to 10 per cent on the first £1m of gains, rather than the personal rate of 18 per cent.

Entrepreneurs’ Relief replaced Business Asset Taper Relief, which was abolished in April 2008.