Because of a lack of bookings there’s a risk that your holiday rental property might not qualify for the special tax breaks this year. Is there a legitimate way to prevent this?
Tax advantages
If you own a property which you let for short periods it might qualify for special tax treatment. Instead of the less generous rules for property rental businesses, if conditions are met, you can apply those for furnished holiday lettings (FHLs). The tax advantages of these are:
- capital gains tax (CGT) rollover relief. This can defer the CGT bill if you make a gain from selling the property and reinvest in another
- CGT business asset disposal relief reduces the amount of CGT payable on gains from selling the property whether or not you buy another
- tax deductions for interest and other finance costs on borrowing used for the FHL; and
- capital allowances (a tax deduction equivalent to the cost of depreciation) for furniture, equipment and fixtures used in the property.
Conditions for FHL status
To qualify as an FHL:
- the property must be available for letting to the public for at least 210 days in a year (the availability condition)
- the property must be let to the public as an FHL for at least 105 days in the year (the letting condition); and
- lettings of 31 or more consecutive days to the same tenant must not exceed 155 days in total per year (the occupancy condition).
Trap. Periods where you occupy the property, or allow others to on a non-commercial basis, e.g. friends and family, must be excluded when working out whether the availability and letting conditions are met.
Tip. If someone rents the property for fewer than 31 days but stays longer only because of unforeseen circumstances, you can count it as meeting the FHL conditions.
A tax trap
Not meeting the FHL conditions can cost you extra income tax and CGT. But there’s a saving grace.
Tip. The FHL rules allow a “period of grace election”. You can elect for a property which qualifies as an FHL one year to qualify for up to two subsequent years, even if it doesn’t meet the letting conditions, as long as:
- the property is actually let for some days during the period in question
- there is a genuine intention to meet the letting condition in those years; and
- the other qualifying conditions are met.
Example. Harry and Sally own a holiday cottage which is open for letting to the public between 1 March and 31 October each year (214 days). In 2022 they let the property for 160 of those days. In 2023 the property was available as usual but by the end of October it’s only been let for 60 days. In 2024 it’s let for 100 days. While 2022 and 2024 don’t meet the FHL conditions, by making a period of grace election both can count as if they did, and Harry and Sally can keep the tax advantages.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.