As landlords you may often have heard of certain advantageous tax treatment of a furnished holiday let (FHL). What is a furnished holiday let and how can you potentially benefit?
What is a FHL?
This is a type of rental property classification that results in potentially quite favourable tax treatment. For a rental property to qualify as a FHL it must satisfy the below conditions;
- be within the European Economic Area; and
- be let on a commercial basis with a view to making a profit; and
- be both available to the public for 210 days (30 weeks) and actually let for 105 days (15 weeks) in each tax year; and
- if occupied by the same person(s) for more than 31 days, have a total of no more than 155 days of such ‘longer term occupation’
Typically people think of an FHL as a cottage by the sea but this would limit the relevance and practicality of such rentals. A property in the heart of the city or near a business district where short term letting would be attractive to a tenant, would also qualify provided the conditions are met.
Advantages of an FHL
The major advantage of a property being treated as an FHL is that on sale, the rate of tax payable could be 10% as opposed to potentially 28% resulting in a large tax saving.
Recent tax changes to the amount of interest that can be claimed as an expense have hit the landlord sector hard – see more on our blog here. These changes do not impact FHL and full tax relief is available. Other advantages include;
- Profits from an FHL business are treated as “relevant earnings” for pension contribution purposes unlike other rental businesses
- Capital allowances can be claimed on both integral features and other capital expenditure on items such as beds, sofas, tables, chairs, carpets, cookers, freezers etc
- The market value of the property at death less any outstanding mortgage is likely to be subject to Inheritance Tax. It is possible under certain circumstances to qualify for Business Property Relief (BPR) where the property is operated as a business.
If you are thinking of selling your property you may wish to consider changing your rental property status to that of an FHL.