Many of you may have taken advantage of furnished holiday accommodation over the festive break; or you may be looking forward to doing so later this year. Furnished holiday lettings (FHLs) were certainly an area of growing interest in 2022, if the enquiries we received were anything to go by.
At first, we wondered whether this might be a sign that our office in North London (Finchley to be precise) is now the jewel in the crown of a new tourist hotspot. Did winter skiers flock here for the snowy parks? Were summer visitors fighting over sun loungers at the lido?
Well, not exactly. The trend was actually due to something more predictable: the increasing popularity of Airbnb (and other similar short-term letting models).
Property landlords in the UK and indeed globally have been attracted to the Airbnb model by the higher rents available from short term lettings. This applies not only to rural hideaways but also to city destinations, as visitors look to avoid expensive hotel rates.
If you’re a property owner considering switching to Airbnb, you should consider it with care: it can breach planning regulations, mortgage terms or insurance policies. We also recommend thinking about tax.
Although landlords probably don’t have tax in mind when switching to the Airbnb model, many Airbnb lettings will qualify as FHLs. There are some important tax benefits associated with FHLs.
What tax advantages do FHLs have?
Regarding capital gains tax (CGT), a sale of an FHL business can qualify for Business Asset Disposal Relief (BADR; previously known as Entrepreneurs’ Relief). If the conditions are met instead of the usual 28% tax rate for residential property, the rate is 10% for up to £1m of gains (on a lifetime basis) with a separate £1m allowance for husband and wife.
To claim BADR, the property must have been used as an FHL for at least two years before the date of sale. Curiously it doesn’t seem to matter if the taxpayer has owned the property for 20 years, and in the previous 18 years it was an ordinary buy to let property let on a standard assured shorthold tenancy agreement (AST).
FHLs can also benefit from capital gains rollover and gift relief. On sale of an FHL, tax can be deferred until the sale of the replacement FHL. A gift of an investment property is for tax purposes deemed to be a sale at market value. But gift relief may mean the tax on the gift can be deferred until the donee sells the property.
The rules which restrict tax relief for interest paid by individuals on a normal buy to let do not apply to FHLs. And capital allowances can be claimed on FHLs even though they’re not available on ordinary dwellings.
So what is an FHL?
To qualify as an FHL, a property must:
- be in the UK or the European Economic Area;
- be let on a furnished basis;
- be let as holiday accommodation; and
- meet the FHL conditions.
The FHL conditions are detailed but in summary:
- the property must be available for holiday letting for at least 210 days;
- it must actually be let as holiday accommodation to members of the public for at least 105 days; and
- lettings for more than 31 days must not exceed 155 days in total.
The last condition is useful for FHLs in seasonal locations. A property could be let on a standard AST during the closed season as long as the letting doesn’t exceed 155 days.
Curiously there is no definition of what “let as holiday accommodation” means and the expression probably takes on its everyday meaning. This can create uncertainties.
A guesthouse in Eastbourne will on average attract people looking to enjoy a holiday on the South Coast. But what if a room is let to a salesman visiting to meet with customers? Or a room in Blackpool occupied by a politician attending a Party Conference? Do these still count as let as holiday accommodation? The issue may be more acute in Finchley and other outer areas of big cities where a larger proportion of guests might be visiting the area for business rather than pleasure.
HMRC do not specifically comment on this issue in their published guidance. If the majority of lettings are to holidaymakers, it seems unlikely that an occasional letting to a salesperson would jeopardise the FHL status.
What tax disadvantages do FHLs have?
One potential tax downside of FHLs is that if the accommodation is advertised or held out as suitable for holiday or leisure use and letting income exceeds the VAT threshold (currently £85k), VAT has to be charged. The logic for this is that the short term letting is more akin to a hotel letting than a normal letting on a normal tenancy agreement. The upside is that this will in principle open the door to VAT recovery on maintenance and refurbishment costs.
One tax where FHL status doesn’t help is inheritance tax (IHT). The decided tax cases have generally found that FHLs are investments, and not businesses which qualify for full or partial exemption from IHT.
So it is worth thinking about FHLs for the tax benefits as well as the commercial ones. For more information on FHLs’ tax implications, and other property tax planning, please get in touch with your usual BKL contact or use our enquiry form.
(And, should you wish to follow our local tourist trail, we can direct to you to an array of filming locations and celebrity birthplaces, not to mention an office tour.)