“When is a “business” not a business?
Many people own and operate Furnished Holiday Lets (FHLs) in the UK. There is a myriad of tax advantages from an income tax perspective if your FHL qualifies.
The effect of these is that the letting is treated as a business for tax purposes, and you can deduct more expenses than otherwise would be allowable for regular rentals as follows:
- Entitlement to plant and machinery capital allowances on furniture, furnishings, etc. in the let property, as well as on plant and machinery used outside the property such as vans and tools.
- Capital Gains Tax reliefs for traders, such as rollover relief and Business Asset Disposal Relief (BADR). BADR allows you to pay CGT at 10% on gains of up to £1m, rather than the standard 20%.
- The finance costs and interest restriction that applies to regular rentals does not apply to any loans/mortgages referable (on a just and reasonable basis) to the part of the property business that consists of furnished holiday lettings. Therefore, if the property business consists entirely of furnished holiday lettings, then this restriction does not apply.
- Income is pensionable and can be used when calculating allowable pension contributions.
The qualifying conditions to be treated as a holiday let are complex and are determined by the number of days the property is available to let and indeed is let during the year, as well as the duration of each stay.
Inheritance Tax (IHT) Position
Many businesses qualify for relief from IHT on someone’s death under provisions known as Business Property Relief (BPR). This means there is no IHT in the estate if the business is a going concern. As a FHL qualifies as a business for income tax and capital gains tax purposes, it would be reasonable to assume the same applies for IHT. However, this is not necessarily the case.
HMRC’s firm view is that a FHL does not qualify for BPR. There are some tax cases on this which support HMRC’s stance. The key is what level of services are being provided.
The more services that an owner can provide while letting, the better, to distinguish it from a business that invests in property. In practice, where a business is seeking to achieve business property relief, there must be a detailed quantitative and qualitative assessment showing that more than half of the business relates to non-investment activities – which might best be described as “guest services”. In one tax case the owner was providing the following:
- Use by guests of well-maintained gardens, a solar-heated outdoor pool, sauna, barbeque area, games room and laundry facilities
- Supply of fresh flowers, homemade goods, toiletries and cleaning materials for each flat
- Availability of golf buggies and bicycles for hire
- Unpacking guests’ grocery shopping orders
- Assistance with arranging events/parties such as weddings, anniversaries etc
- Purchase of fresh fish for guests’ use
- Weekly cleaning of all communal facilities including the pool
In this case the taxpayer won.
In conclusion we would suggest you consult with us on the qualifying rules on furnished holiday lets so that you can take advantage of as many of the tax breaks as possible. Simply call 020 3915 8585 or email us.