This is a special type of furnished letting, and it enjoys a number of tax advantages over the ordinary letting of furnished or unfurnished residential accommodation. We will look in detail at the advantages and the rules, but in summary, the advantages are:
- Capital Allowances for furniture and machinery and plant in the property – even in the residential parts, (unlike with ordinary BTL properties) and including original items or replacements.
- The income from the property counts as “earned income” for the purposes of making pension contributions.
- Because the income is treated as “earned income” in many respects, the general rule about rental income from property owned jointly by a married couple or civil partnership does not apply – they can divide the rent between themselves in any proportion they decide (like a ‘genuine’ partnership).
- If you sell the property, it will be treated as a business asset for CGT, so you may be able to claim Entrepreneurs’ Relief (Business Asset Disposal Relief), and you can claim Rollover Relief if you reinvest in another property.
- If you make a gift of the property (to your children, for example) you can “hold over” any capital gain.
- For Inheritance Tax, the property may qualify as “Business Property” but only in certain circumstances.
So, what is “Furnished Holiday Accommodation?”
First of all, it does not necessarily have to be holiday accommodation. The tests are all to do with the type and duration of letting, and the tenants do not have to be on holiday. In practice, it is likely that most tenants will be holidaymakers, but there is no need to make sure they are on holiday during their stay!
In order to qualify as Furnished Holiday accommodation, a property must be:
- Available for short term (each let under 31 days) letting as furnished residential accommodation on a commercial basis to the public generally for at least 210 days in the year (so no offices, and no letting at a cheap rate to friends or family during this period), and
- Actually be let on these terms for at least 105 days in the year,
The typical pattern is for there to be short term lettings for the spring, summer, and early autumn months, and then for there to be a longer term “winter let” from, for example, 1 November to the end of March, but this is not a rule – the 210 days can be made up of any days in the year, as can the 105 days
Furnished Holiday Accommodation (FHA) in the European Economic Area
Furnished Holiday Accommodation in the European Economic Area that comes within the rules set out above enjoys the same tax privileges, but is treated as a separate property business from the UK holiday lets (for now, at least; how this applies outside of the UK may of course change in time, now that the UK has left the EU).
You can claim Capital Allowances on the cost of furniture and such items as cookers, fridges, and so on. (You will remember that for a normal furnished letting, these could only be dealt with by using Replacement of Domestic Items Relief, or as repairs to the fabric of the building for assets that counted as fixtures and fittings).
You can therefore claim the “Annual Investment Allowance” of 100%, usually on up to £200,000 of expenditure each year on plant and machinery, and a writing down allowance at 18% per year on any balance of expenditure (6% on “integral features” such as plumbing, lighting and heating. Note that the Annual Investment Allowance has temporarily been increased to £1million per year, for qualifying expenditure up to 31 December 2021. There is also now a Super-Deduction at a rate of 130% for expenditure on qualifying assets incurred up to 31 March 2023 – buy only where made by companies.
Note also that the Renewals Basis has been abolished by statute for all businesses except ordinary furnished lettings, where it effectively ‘lives on’ as Replacement of Domestic Items Relief. Furnished Holiday Accommodation is excluded from normal furnished lettings treatment in this context, (i.e., while it used to be eligible for the Renewals Basis, it cannot access Replacement Domestic Items Relief) basically because you can claim Capital Allowances instead.
Since April 2011, losses on FHA in the UK can be set only against other UK income from UK FHA, and the same will apply to losses on EEA FHA – they can be set only against income from other EEA FHA. FHA losses cannot be set against ‘ordinary’ BTL property business profits and vice versa
FHA income is treated as “earned income” for the purpose of making pension contributions to your pension scheme, so it ranks alongside Bed and Breakfast, hotel and property development as a trading activity, unlike normal residential and commercial letting. In the past, ordinary landlords without a source of earned income could not make tax efficient pension contributions. This is probably less problematic since the new rules for pension schemes came into effect in 2006, (which allow modest contributions of up to £3,600 gross per annum without needing relevant earnings, such as trading profits) but it can still be useful for those who want to fund pension contributions higher than that.
Profit Split for Married Couple or Civil Partnership
Because the income is “earned income” the 50:50 rule referred to above does not apply to married couples – they can split the rental income between them in any proportion they agree.
Capital Gains Tax
This is where the most significant reliefs for FHA can be found:
If you make a capital gain when you sell certain types of eligible business asset, you can “roll over” that gain by investing in an appropriate new business asset, and FHA is one of those assets, while normal lettings are not. So, a gain on the disposal of an FHA property is potentially eligible to be rolled over depending on the nature of the asset into which the proceeds are reinvested; likewise a gain from the disposal of an eligible business asset can be rolled over into an FHA property (or both the sold and acquired assets may be FHA property).
Case Study – Rollover Relief for FHA
David owns and runs a pub – he does not live on the premises, because we explained to him when he bought it that that would make this Case Study too complicated!
He decides he would like to retire and lead a quieter life, so he sells the pub for £500,000, making a capital gain of £250,000 (before Entrepreneurs’ Relief or BADR). If he invests his £500,000 in ordinary letting property, he will not be able to postpone the CGT of about £24,000 on his capital gain of £250,000 (we will see how this works out when we come to Entrepreneurs’ Relief).
If instead he invests the £500,000 proceeds into FHA (say in three holiday cottages), he will pay no CGT, because the gain will be “rolled over” into the FHA properties. Instead of the £250,000 gain being taxed, it is deducted from the cost of the holiday cottages (for CGT purposes) so that when he comes to sell these, he can only deduct £250,000 (real cost £500,000, less gain rolled over £250,000) when he computes the gain on the holiday cottages. Rollover Relief postpones the original gain until you sell or dispose of the replacement asset. It does not get rid of the gain forever (although the gain may potentially be reinvested and postponed again).
He need not invest all the sale proceeds to get some rollover relief, but some of the gain will then be taxable. If he only spends £400,000 on the new cottages, the computation will be:
|Sale proceeds on pub||500,000|
|Less reinvested in FHAs||(400,000)|
|Amount not reinvested||100,000|
|Amount of gain not reinvested (250,000 – 150,000)||100,000|
So, he will pay CGT on a gain of £100,000. It may in some cases be appropriate not to reinvest (say) £12,300, deliberately so as to use the CGT Annual Exemption. This may become more worthwhile, if there are joint owners so there are several Annual Exemptions available. Note that you do not have to isolate or trace actual funds from the sale of one eligible asset to the acquisition of another: it is sufficient merely to invest an amount of money into a qualifying asset.
Conditions and limitations
There is a limited window of opportunity for reinvesting in this way. The new eligible asset must be bought during a four-year period which begins one year before the old eligible asset is sold, and ends three years after it is sold. In some circumstances, the three-year limit after the sale of the old eligible asset can be extended, but do not rely on this without taking advice from a Tax Adviser first.
Note 1: Because FHA is defined by how it is let, rollover relief on investing into FHA properties will at first be granted conditionally on the basis that, provided the property is in fact used as FHA, the relief will be confirmed.
Note 2: If you subsequently occupy the FHA as your home, so that when you sell it you are entitled to some measure of relief from CGT, then the held over gain will be brought back into charge.
Gifts of Business Assets
Normally, if you make a gift of an asset, or deliberately sell it for less than its market value, you will be charged to Capital Gains Tax as if you had sold it for its market value on the day you disposed of it.
This applies to almost all such transfers where you intend to confer some benefit to the recipient: they do not have to be relatives or otherwise connected to you for the “market value rule” to apply (although transfers between spouses and civil partners who are living together are usually “CGT-free”). If the asset is a “business asset”, however, you can hold over the gain. Normal investment properties are not “business assets” for this purpose, but FHA properties are:
Case Study – Hold Over for Gifts of FHA
Some years after buying the FHA, David is getting on in years, and he decides he will make a gift of one of his holiday cottages to his daughter, Rosie.
After rollover relief across the three properties as above, the “CGT base cost” of this particular cottage is £100,000, but its market value is now £250,000. If this were not FHA, and David gave it to Rosie, he would make a capital gain of £150,000, on which he would pay CGT of about £14,000, (assuming he is still eligible for Entrepreneurs’ Relief or BADR) but as it is FHA, he can “hold over” this gain.
He will pay no CGT, but Rosie’s “cost” when she comes to sell will be reduced by the gain held over, so her CGT base cost will be £250,000 less £150,000 = £100,000.
In effect, Rosie acquires the asset at David’s base cost: the gain on her eventual disposal will be David’s postponed gain, plus the increase in value while Rosie has owned it.
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