Furnished holiday lettings

The existence of special rules to deal with what are termed ‘furnished holiday lettings’ have been mentioned several times already in this briefing. There are some significant tax advantages where a property qualifies in this category.

What are the conditions for special treatment

The rules apply to the commercial letting of furnished holiday accommodation in the UK. This means that letting simply to family members or friends will not qualify unless they pay a commercial rent. Nor will the letting of overseas holiday property meet the basic conditions. In order to qualify the property must be:

• available for holiday letting to the public on a commercial basis for 140 days or more, and
• let commercially for more than 70 days or more, and
• not occupied for more than 31 days by the same person in any period of seven months.

The period by reference to which those limits must be considered will normally be the tax year. Special rules apply at the start and end of lettings.

If you own more than one furnished holiday let, you can claim to calculate the 140 and 70 day limits, based on the average for all the properties you own, in order to satisfy the test.

Advantages include:

• a loss on furnished holiday lettings can be set against other income of the same year including non property income
• a loss made in the first three years of letting may be carried back up to three years
• income from this source can be used to calculate entitlement to tax relief on pension contributions
• capital gains made on the sale of one furnished holiday let can be ‘rolled over’ against the cost of buying another similar property purchased up to a year before or three years after the date of sale
• if a property is gifted, a claim can be made to ‘hold over’ the gain so that it does not become due until the recipient sells it
• taper relief in calculating the gain is based on the business taper rate so that after one year of ownership 50% of the gain is removed and after two years the gain is reduced by 75%
• for inheritance tax purposes it may be possible to claim a reduction of up to 100% in the value of the property passing on death or on a chargeable transfer (this is subject to conditions which HMRC impose).

If you own properties that are let as furnished holiday lets in addition to other properties you are required to keep the activities separate for the purposes of calculating income.