To gain the tax advantages of a Furnished Holiday Let (FHL), the property must qualify, and HMRC have a series of qualifying conditions which must be met.
If the criteria is still not met, the property will be treated as a buy-to-let property and taxed accordingly. As such the benefits associated with an FHL would be lost.
As well as the requirement that the FHL is located in the UK or European Economic Area (EEA) and must be furnished to a standard sufficient for normal occupation, the three main qualifying conditions are:
- Be available for at least 210 days in the tax year
- Be let commercially to the public for at least 105 days in the tax year
- Not be let for more than 155 days in a tax year for periods of 31 continuous days or more.
Private use of the property, to include use by friends or family at a lower than market rate, should also be taken into consideration, and claims for expenses adjusted accordingly.
If you do not manage to reach the 105 day letting condition, there are elections available if more than one property is owned, or if your property reaches the threshold in some years but not others.
The individual can make an averaging election where:
- there is more than one property
- some properties meet all three conditions and some fail the letting condition (i.e. let commercially for at least 105 days in the relevant period) only
The averaging election can be made to average out the let days with respect to properties specified in the election. If the average number of days let is over 105 then all the properties are deemed to meet the letting condition. The election applies for the tax year in question only.
Please note that it is not possible to average lettings of UK FHLs and EEA FHLs. They must be treated separately and be subject to separate elections, where appropriate.
There are also specific time limits, which apply when wishing to make an election.
Period of grace election
The second provision is known as the ‘period of grace’ election. This election applies where all three conditions were met in a tax year, but in the following tax year and the tax year after the letting condition is not met despite a genuine intention to let the property for at least 105 days in the tax year.
An example of when this could happen is where the taxpayer marketed a property to the same or a greater level than in successful years, or where lettings are cancelled due to unforeseen circumstances.
The period of grace election allows the property to qualify as a FHL by deeming the letting condition to be met, as long as the other two main conditions are met for the tax year (i.e. the pattern of occupation and availability conditions).
This election can be very useful where the taxpayer only has one FHL property.
Due to the complexity with the elections and making claims advice should always be taken from an expert to ensure you are being compliant with the rules. If you are looking for advice relating to your FHL, please do not hesitate to get in contact with Jen Kinnear, a member of the Private Client team, or your usual AAB contact.
This blog is the second in a series – you can read the first blog entitled ‘Furnished Holiday Lets – an introduction & your obligations’ here