Tax Breaks for Furnished Holiday Lets

If you are thinking of buying property in the UK, there are some particularly beneficial tax breaks available if you satisfy a number of tests and make your investment a qualifying “Furnished Holiday Letting” (FHL).

What is a "Furnished Holiday Let"?
The Inland Revenue carefully defines the criteria which a property must satisfy in order to qualify as an FHL. The property must be:

• Located in the UK; AND
  
• Available for letting for at least 140 days per year; AND
  
• Actually let for 70 out of those 140 days; AND
  
• Not let to the same person for more than 31 consecutive days during at least 7 months in the year.

Summarised below are some of the tax advantages that can be obtained if investing in FHLs. These are in addition to the treatment which applies to “normal” letting properties. Please bear in mind that where there is any private usage element to the property, corresponding restrictions must be made to the reliefs.

Income Tax

• The expenses of letting the property (e.g. agency fees, council tax, repairs etc.) are tax deductible
  
• Expenditure on certain improvements made to FHLs qualifies for capital allowances, i.e. tax relief is available immediately from the time the expenditure is incurred.
  
• Any loss made on the FHL can be offset against other income earned in the year. For each £1 lost, a higher rate taxpayer can obtain 40% relief against other income immediately.
  
• Interest on any loan used to buy / improve the property is tax deductible

Pensions

• FHL profits are classed as trading profits and are therefore "net relevant earnings" for pension purposes. Such income entitles you to make increased pensions contributions.

Capital Gains Tax (CGT)

• “Rollover Relief” enables deferral of the CGT charge. Anyone who has or will make a capital gain on the sale of a "qualifying" business asset (e.g. the goodwill of a business or property used in one's business) can defer payment on tax of the gain by investing the sale proceeds in an FHL within 12 months before or 36 months after the disposal of the business asset.
  
• FHLs are business assets for CGT taper relief purposes. Provided the property has been owned for over 2 years, only 25% of the gain is chargeable to CGT, giving an effective tax rate of 10%for a higher rate taxpayer (20% where the property is held for one complete year). In comparison, the maximum taper relief applicable to a normal buy-to-let property applies once it has been owned for over 10 years and would only reduce the effective rate to 24%. The CGT annual exemption (£8,200 in 2004/05) may reduce the taxable gain even further, and where the property is held in joint names, each owner can apply their own annual exemption to his / her share of the gain.

Inheritance Tax (IHT)

• The FHL can be gifted during your lifetime or in your will free of inheritance tax implications (though note that a lifetime gift will may give rise to a capital gains charge). This is thanks to IHT "business property relief" which is available at 100% provided the property has been your FHL for more than 2 years.

As a final note, the property does not have to be let for holiday purposes. How about letting the property on a series of short lets to overseas servicemen or business travellers, for example?

Should you be considering investing in an FHL or even already own an FHL but believe that you are not taking advantage of all the available tax breaks, I would be pleased to discuss your specific circumstances with you. Please give me a call on (01753) 888 211.

STEVE COOK (Tax Partner)