Furnished holiday lettings (FHLs) have a number of tax advantages over residential lets. These advantages include the opportunity to benefit from a number of capital gains tax reliefs.
The capital gains tax legislation treats the commercial letting of furnished holiday letting as a trade. This allows the FHL business access to certain reliefs which are available to traders.
The business must qualify as an FHL to benefit from the reliefs. To do this, it must be a furnished property that is let commercially with a view to making a profit. In addition, it must pass the following occupancy conditions:
Where a person has more than one holiday let, the third test can be met on average across all properties by making an averaging election. If the conditions are not met for a particular year, but have been met previously, it may be possible for the property to be treated as an FHL under a ‘period of grace’ election.
Roll-over relief is particularly beneficial if you want to sell one holiday let and invest in another. The relief allows the gain arising on the disposal of the furnished holiday let to be ‘rolled over’ into the new property. This means that any gain arising is not immediately chargeable. Instead, the base cost of the replacement FHL is reduced by the gain. The gain will crystallise when that property (or a subsequent property) is sold without the gain being rolled over into a replacement asset.
This allows landlords with furnished holiday lets to sell and reinvest without losing access to valuable capital. By contrast, a landlord letting residential accommodation must pay the capital gains tax on any gain arising on the disposal of the property within 60 days.
Ben has two holiday let properties in Norfolk which meet the conditions for FHLs. He sells one of the properties for £400,000, realising a chargeable gain of £75,000. He buys a property in Margate to let as an FHL for £450,000, rolling over the gain. The base cost of the Margate property is reduced by £75,000 to £375,000. Ben, who is a higher rate taxpayer, is able to reinvest the full proceeds in the Margate property without having to give £21,000 (capital gains tax of £75,000 @ 28%) to the taxman.
If he eventually sells the Margate property without reinvesting in another business property, the gain arising will be calculated as if the property cost £375,000 rather than on the actual cost of £450,000. The gain is deferred until that property is sold.
The other main advantage of an FHL from a capital gains tax perspective is the ability to benefit from business asset disposal relief. As long as the qualifying conditions are met, the landlord is able to benefit from a favourable capital gains tax rate of 10% on lifetime gains of up to £1 million where the property is sold on or following the cessation of the business. By contrast, a landlord making a gain on a residential let would pay capital gains tax at the rate of 28% if they were a higher rate taxpayer. The main qualifying condition is that the landlord had owned the business or been a partner in it for at least two years up to the date on which the business ceased.
The relief does not apply to properties sold where the business is continuing (unless they are comprised in the disposal of part the business).
Hold-over relief is also available on the gift of an FHL property. Again, this has the effect of deferring the gain until the recipient disposes of the property. This can be a useful tool in succession planning if the FHL is gifted to the landlord’s child/children. The base cost of the gifted property is reduced by the held-over gain.
Partner note: TCGA 1992, ss. 152, 165, 169H and 241.