Furnished holiday letting (FHL) is treated as a trading activity for income tax, corporation tax and CGT purposes, but may not be for IHT purposes.
For National Insurance (NICs) purposes FHL profits are treated as investment income, and not earnings so no NICs is payable on profits made by an individual.
Unlike an ordinary letting business Capital Allowances may be claimed on furniture & fixtures used in a FHL property, as well as other plant and machinery.
FLH activities are subject to VAT if the trader is VAT registered or when VAT registration thresholds are exceeded.
From 1 September 2012 Foreign FHL owners who have not got a fixed establishment or fixed business in the UK are required to register for VAT as soon as they make a taxable supply: the registration thresholds do not apply for foreign businesses.
Until 5 April 2011 FHL losses qualified as income tax Trade losses : they were available for sideways relief (they can be carried forward and back and set against general income from other sources) and terminal loss relief.
From 6 April 2011 FHL losses are restricted for income tax: they can only be carried forward against profits made from the same UK or European holiday business.
FHL profits are relevant earnings for pensions purposes.
A FHL property will qualify as a business asset for the purposes of CGT Entrepreneurs’ Relief and for other CGT reliefs: for the disposal of business assets (such as roll-over and gift relief)
A FHL may qualify for Inheritance Tax Business Property Relief if substantial additional services are provided in addition to property letting. The new rules for FHL mean that FHL letting must occur for more days than previously and so recent case law on this topic may already be out of date.
A letting business may fail to be a FHL for Income Tax or Corporation Tax purposes because it does not meet all the qualifying conditions, however it is possible (although rare) that it could nevertheless qualify as a business asset for CGT purposes.
To qualify as a furnished holiday letting the accommodation must be:
– Located in the UK or European Economic Area (EEA) (this includes Iceland, Liechtenstein and Norway)
– Let commercially
– Available to let and actually let for a minimum number of days: these periods are increased from 2012.
– As a result of the changes in 2012 many properties will lose FHL status however, the existing averaging rules combined with new “a period of grace” condition will in many cases ensure that some properties will continue to qualify for up to three years following the changes.
Capital allowances: changes in the legislation led to the introduction of new rules for a new class of asset called “integral features”. This resulted in the reclassification of assets which were previously been regarded as part of the building. These include an electrical system, a water system and solar shading: it may be possible to claim allowances on any of these if allowances have not already been claimed, see Fixtures: overview.
From 6 April 2011
The FHL regime was extended to include property located in the EEA.
“Sideways” loss relief ends: a loss made in a qualifying UK or EEA FHL business may only be set against income from the same UK or EEA FHL business.
Losses on UK a UK FHL may only be offset against profits from another UK FHL, and likewise EEA FHLs face the same restriction
An end to terminal loss relief on cessation of a FHL business.
A Period of Grace relief applies in addition to Averaging.
From 6 April 2012
The qualifying conditions changed: the minimum period over which a qualifying property must be available for letting to the public in the relevant period is increased from 140 days to 210 days in a year with effect from April 2012.
The minimum period over which a qualifying property is actually let to the public in the relevant period is increased from 70 days to 105 days in a year with effect from April 2012.
Capital allowances: new rules was introduced to prevent taxpayers exploiting the rules for fixtures. Sellers of FHL (and other commercial property) are required to pool their expenditure: this matter should be investigated during the conveyancing process.
From 1 Sept 2012: VAT foreign owners of FHL may need to register for VAT unless they have a fixed establishment or place of business in the UK.
IHT and CGT tax cases: in two different tax cases before the Upper Tier Tribunal it was decided on the first hand that FHL does not qualify for inheritance tax (IHT) business property relief, but in another case it was agreed that FHL does qualify as a business for CGT hold over relief