Although furnished holiday lettings are charged to income tax under the property income rules, provided certain conditions are met, landlords of furnished holiday lets are treated as if their furnished holiday letting business is a trade for some purposes. This means that they are able to enjoy a number of advantages over other types of letting. The advantages include:
the ability to set losses against total income rather than being restricted to offset against rental profits only;
entitlement to plant and machinery capital allowances on furniture, furnishings and fixtures in the let property; and
availability of capital gains tax reliefs, including business asset rollover relief and entrepreneur’s relief.
However, it is important to appreciate that furnished holiday lettings are not actually taxed as a trade. They are still taxed as property income but enjoy some advantages available to trades. Because of this treatment, the profits from furnished holiday lettings should be calculated separately from those for other types of lettings.
To qualify for the advantageous tax rules, the accommodation must be qualifying holiday accommodation and the letting must be on a commercial basis.
The commercial basis test is met if the accommodation is let with a view to realising a profit. HMRC generally take a broad view of this and accept that in the close season the lets may not produce a profit. But they will not allow the furnished holiday treatment if the property is frequently used by family and friends for little or no rent.
Qualifying holiday accommodation is accommodation that satisfies:
the availability condition;
the letting condition; and
the pattern of availability condition.
The availability condition requires that the accommodation is available for commercial letting as holiday accommodation for at least 140 days in the tax year, whereas the letting condition requires that the property is actually let for 70 days in the tax year. However, if the property is let to the same person for more than 31 days, the let is not treated as a let of holiday accommodation. Where there is more than one property, the landlord can elect for the letting condition to be met by reference to average occupancy rates.
The pattern of availability condition requires that the accommodation is not let for periods of longer-term occupation (i.e. more than 31 days) for more than 155 days in the tax year. This will prevent properties that are, say, let to students during term time and as holiday lets in the holidays from qualifying for the furnished holiday letting treatment.
The furnished holiday letting treatment was originally only available in respect of UK properties. However, HMRC now allow the treatment in respect of properties in the EEA, but not elsewhere in the world.
In the current climate, the main advantage of this treatment is that any losses can be used up immediately against other income rather than set against future property income. However, time is running out to make the most of this.