HOLIDAY HOMES – new from HMRC (June 22nd 2020)
Many of our clients have rental income from Holiday Let properties.
As a result of the Coronavirus some properties might cease to qualify as a furnished holiday let and so you will lose the corresponding tax advantages. What steps can you take to prevent this?
What are the Tax Advantages?
If you own a property which you let and if you can meet the conditions for a furnished holiday let (FHLs) then the following tax advantages follow:
- 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 entreprenuers’ relief (ER), now called business asset disposal relief. This reduces the amount of CGT payable on gains from selling the property whether or not you buy another; the rate is 10% tax rather than either 18% or 28%;
- You are allowed 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.
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).
Family and friends and personal lettings
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.
HMRC new guidance
If someone rents the property for fewer than 31 days but stays longer only because of unforeseen circumstances, e.g. because they or a family member is self-isolating due to coronavirus, you can count it as meeting the FHL conditions.
The 2020 Tax Trap
Not meeting the FHL conditions can cost you extra income tax and CGT. This is increasingly a danger in 2020 as the coronavirus lockdown eats into the holiday season. But there is a saving grace.
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.
Paul and Rosie own a holiday cottage which is open for letting to the public between 1 March and 31 October each year (214 days). In 2019 they let the property for 160 of those days. In 2020 the property was available as usual but by the end of October due to the Coronavirus it has only been let for 60 days. In 2021 it’s let for 100 days. While 2020 and 2021 don’t meet the FHL conditions, by making a period of grace election both can count and Paul and Rosie can keep the tax advantages.
Where a property qualifies as a furnished holiday let in a year because it meets all the conditions but fails to do so in the following year (or the year following that), you can make a “period of grace” election. HMRC will then treat the years where the conditions weren’t met as if they were so that the tax advantages aren’t lost.