The Tax Advantages of the Business of Furnished Holiday Lets -FHLs
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With the property
market facing falling prices and slow sales, it is timely to look at
letting market and the tax advantages of furnished holiday lets (FHLs).
the collapse of the odd airline, the UK industry would currently be
In the UK
“business” can have distinct tax advantages e.g. Business Property
for Inheritance Tax (IHT). Other advantages are Entrepreneurs’ relief
(ER) and rollover
relief for Capital Gains Tax (CGT) and the offset of “business” losses
against total income.
It is important that
clients who own holiday cottages should try and ensure as far as
they qualify for IHT relief. Case law suggests that in order to qualify
BPR, it might be necessary to own a number of properties.
In the past IHT relief
has normally been allowed on FHLs where the following was in place:
lettings were short term (for example, weekly, fortnightly); and
either himself or through an agent such as a relative or housekeeper,
substantially involved with the holidaymaker(s) in terms of their
and from the premises, even if the letting period were for part of the
However, very recently
HM Revenue and Customs made the following announcement:
”Recent advice from
Solicitor’s Office has caused us to reconsider our approach and it may
that some cases that might have previously qualified should not have
In particular we will be looking more closely at the level and type of
services, rather than who provided them.”
Risk areas which might
jeopardise the IHT claim are:
- Where the services
provided to holidaymakers are insubstantial;
- Where lettings are
to friends and relatives; and
lettings (including assured short holds).
BPR has been achieved
on one property but there is now greater emphasis on the need to
services to the tenanats.
The guidance is found
in Share Valuation Manual SVM 27600. The manual states:
some instances the distinction between a business of furnished
holiday lettings and, say, a business running a hotel or a motel may be
minimal that the Courts would not regard such a business as one of
mainly holding investments” for the purpose of s.105(3) [IHTA 1984].
you encounter any difficulties in this area you should refer to the
What Qualifies as a
The property must meet
certain requirements to qualify as a FHL and be eligible for the tax
The property does not
have to be in a tourist area, but the pattern of lettings must satisfy
three conditions (ITTOIA 2005, pt 3, ch 6):
property must be available for commercial letting as holiday
at least 140 days a year.
actually be let as holiday accommodation for at least 70 days a year.
not normally be let for a continuous period of more than 31 days to the
tenant in seven months of the year, and those seven months include any
in which it is actually let as holiday accommodation.
Whereas non ‘holiday
let’ periods can qualify for the Income Tax, National Insurance (NI)
advantages, in order not to fall foul of IHTA 1984 s.105 (3), greater
of the provision of practical services to genuine holidaymakers will
Other relevant factors
- The cottage is
located in a tourist area;
- The property is
- Small business
rates are paid;
- The cottage is
awarded a rating by the English Tourist Board or equivalent;
- Public liability
insurances are paid on the property;
- The operation of
the business is commercial, and profits are made and tax paid
tax-planning confusion rests with the extent of the involvement with
the tourist. The tax relief is helped if there are lots of services
e.g. ‘the meet and greet’, organising car hire, cleaning and laundry,
basic food for the fridge, etc. The owner can subcontract out these
The important point is the extent of the involvement with the
even if this is handled by an agent. The key is to ensure there is a
contemporaneous record of the services provided. Further examples are
the cottage with local maps and guides to historic attractions, and
the maintenance of the property before, during and after the period
standard rate of VAT applies to rents for holiday lets as long as
they are advertised as such (Value Added Tax Act 1994 (VATA 1994), Sch.
1, note 13). If they are offered at lower rates in the off-season, they
treated as residential accommodation if they are let for that purpose
than four weeks and the property is clearly situated in a resort where
clearly seasonal. Thus a VAT-registered sole trader owning a holiday
will have to charge output VAT on their VAT return, but will be able to
input VAT on repairs and related costs. If high expenditure on the
is planned, then the organisation of the ownership of the property to
within the scope of VAT can be considered as a tax planning exercise.
or three FHL properties would clearly cause turnover to rise above
the VAT registration limit.
of Capital Gains
FHL qualifies as an asset that capital gains can be rolled over
into. It might be that the FHL conditions are too difficult to comply
the property is subsequently used as a residential let instead. If this
case, then rolled over gain will not crystallise until the property is
6 April 2008 the taxpayer can no longer claim Business Asset Taper
Relief (BATR) on capital gains and the flat 18% rate applies to all
However, ER is available which allows the effective 10% rate of tax for
million of lifetime gains on business disposals.
commercial property does not qualify for ER which includes Farm
Business Tenancies (FBT) with the exception of furnished holiday lets
qualify as an effective ‘trade’.
the Income Tax Loss Relief
advantage of FHLs is the ability to claim losses against total
income in the year of the loss and the following year with all the
of opening year’s losses.
'sideways’ loss relief advantage of the FHL makes interesting Income
Tax planning in years of high earnings for the taxpayer and possible
overhead or management expenses.
of the Advantages
for maximising the FHL benefits:
status with the provision of services by the landlord;
claim ‘sideways’ loss relief;
protection from IHT where substantial involvement with holidaymakers;
of capital gains into the purchase, possible change of use and CGT
crystallisation only on the disposal;
‘sting’ for registered individuals, but possibly use to advantage when
About the Author
Article supplied by Julie Butler F.C.A. Butler & Co, Bowland
House, West Street, Alresford, Hampshire, SO24 9AT. Tel:
01962 735544. Email; firstname.lastname@example.org, Website; www.butler-co.co.uk
Julie Butler F.C.A. is the author of Tax Planning for Farm and Land
Diversification ISBN: 0754517691 (1st edition) and ISBN: 0754522180
(2nd edition) and Equine Tax Planning ISBN: 0406966540. The
third edition of Tax Planning For Farm and Land Diversification will be
published shortly. To order a copy call Tottel Publishing
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Article Published/Sorted/Amended on Scopulus 2009-03-02 12:43:00 in Tax Articles