Whether a property is classed as an investment letting or a furnished holiday letting is important, as both have different tax treatments particularly when it comes to capital gains tax. An investment letting is one where the property is let to one tenant, typically through a short term assured tenancy agreement. This is treated as investment income and when the property is sold any gain will be subject to capital gains tax, either at 18% or 28%.
A furnished holiday letting is treated as a trade and the landlord is viewed as carrying on a ‘business of furnished holiday letting’. There are several advantages to the income from FHL (furnished holiday lettings) being treated as a trade. For example the income will qualify as relevant earnings for pension purposes. Capital allowances are also available. However, perhaps the biggest reason for wanting a letting classed as a FHL is the capital gains tax relief available in the form of Entrepreneurs Relief which effectively reduces the capital gains charge to 10% on sale of the property.
So, just what is a FHL?
Whilst most clients would argue, I think, that if they have a property that they have furnished for holidaymakers it is a FHL, they need to be aware of how the Revenue views a FHL. First and foremost the property must be let with a view to making a profit and furniture for the use of the holidaymaker must be provided.
However there are three further conditions that must be met for a property to be classed as a FHL. Each of these has various rules and exceptions but the essence of them is:
a) The property must be available for letting to the public for at least 210 days in a year.
b) The property must be actually let for at least 105 days in the year. There is an option to average the number of days let if the landlord owns more than one FHL. There are also certain exceptions for a drop in letting due to, for example, exceptionally poor weather.
c) If the property is let to the same person for more than 31 days continuously this does not count towards the 105 days above. Also if the total of any longer term lettings adds up to more than 155 days in the year the property cannot be a FHL.
Therefore if you have a FHL I suggest you take professional advice on how it will be treated when it comes to taxation so that you don’t fall foul of the rules in place. My practice is happy to advise you on the letting of holiday homes and you can contact us via our website http://www.turlandco.co.uk