UK Furnished Holiday Lets (FHL) and Inheritance Tax (IHT) ReliefMany people will be aware that special Income Tax treatment applies to FHLs but it is not generally appreciated that FHLs may qualify for Business Property Relief (BPR) for IHT, providing the owner plays an active part in the management of the tenancies. Many clients can use this as an active tax-planning tool to ensure that existing property does qualify and to swap non-qualifying assets eg, let property, for the FHL.
FHLs get BPR at 100%, thus saving 40% IHTMany have purchased a retirement holiday home that they use and let out.
To qualify as an FHL and be eligible for the income tax relief the property does not have to be in a tourist area, but the pattern of lettings must satisfy these three conditions:
- The property must be available for commercial letting as holiday accommodation for at least 140 days a year.
- It must actually be let as holiday accommodation for at least 70 days a year.
- It must not normally be let for a continuous period of more than 31 days to the same tenant in seven months of the year, and those seven months include any months in which it is actually let as holiday accommodation.
For IHT it is necessary to show that the FHL is a “business” not just an “investment”.
In some instances the distinction between a business of furnished holiday lettings and say, a business of running a hotel or a motel may be so minimal that the Courts would not regard such a business as one of 'wholly or mainly holding investments' for the purposes of BPR.
It is possible therefore to get relief where:
- the lettings are short-term (for example, weekly or fortnightly); and
- the owner – either himself or through an agent such as a relative or housekeeper – was substantially involved with the holidaymaker(s) in terms of their activities on and from the premises even if the lettings were for part of the year only.
Demonstrating substantial involvement is easier if significant services are provided eg, 'meet and greet', organising car hire, cleaning and laundry, supply of basic food for the fridge, etc. The owner can subcontract out these services. The important point is the extent of the involvement with the holidaymakers, even if this is handled by an agent. It is also important to ensure there is a contemporaneous record of the services provided. Further examples of 'involvement' include visits to the cottage with local maps and guides to historic attractions, and organising the maintenance of the property before, during and after the period of let, including gardening.
Other factors relevant to the property might be:
- the cottage is located in a tourist area;
- the property is marketed professionally;
- small business rates are paid;
- the cottage is awarded a rating by the English Tourist Board or equivalent;
- public liability insurances are paid on the property;
- the operation of the business is commercial and profits are made and tax paid accordingly.
The burden of IHT for many has been well documented by the popular press. They have even campaigned for action, but with some relatively simple tax planning action relief could be closer than you think. For those planning to move furnished property to an FHL business, after 2 years as a qualifying business, 100% IHT relief is available.
Our next article will examine the possibility of extending this principle to overseas rental properties?!
If you need further information regarding the above article or would like to discuss how we can help you, please contact Steve Cook, Tax Partner at
steve@nunn-hayward.com or tel: 01753 888211.
