Jenny Healy

The pandemic has clearly impacted the UK’s tourism sector heavily, including many Furnished Holiday Let (FHL) businesses, which were forced to close for a large part of the 2020 holiday season. Even following reopening, stringent cleaning requirements and social distancing regulations meant increased costs, longer turnaround times and reduced capacity for those businesses.

As a result, many properties have failed to meet the FHL criteria over that period. To qualify for the FHL treatment in a tax year, a property must:

• Be available for commercial letting as holiday accommodation to the general public for 210 days in the year
• Be actually let commercially as holiday accommodation to the general public for at least 105 days in the year (excluding periods of longer-term occupation, i.e. continuous periods of more than 31 days), and
• Not be let for periods of longer-term occupation (continuous periods of more than 31 days) for more than 155 days per year.

The above tests will generally apply to a tax year, unless it is the first or last year of letting.

There are several differences between FHLs and standard residential lettings, including the fact that FHLs are treated as a trade. The provision of the holiday accommodation is subject to VAT and plant and machinery capital allowances can be claimed on furniture, fixtures and white goods in the property. Profits from FHLs also qualify as earnings for pension contribution purposes and the restrictions on deductibility of finance costs for tax purposes, that apply to residential landlords, do not apply to FHL businesses, so owners get full tax relief on any mortgage interest.

In addition, Capital Gains Tax (CGT) reliefs such as Business Asset Rollover Relief, Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) and relief for gifts of business assets also apply to FHLs.

Where a property business no longer qualifies as an FHL, these benefits will no longer apply.

Where more than one FHL is let, an averaging election can be made. This is useful where some but not all properties have met the letting condition. The number of days let is averaged across the portfolio of properties let as FHLs and can result in all properties then qualifying.

Similarly, where a property has not been let for 105 days or more in the year, a ’period of grace’ election can be made. This allows the property to qualify as an FHL by deeming the let days condition to have been met, so long as all other FHL conditions were met for the year. It must be demonstrated that there was a genuine intention to let the property in the year. The HMRC guidance includes cancellation due to unforeseen circumstances, for example closures due to the lockdown restrictions, as an acceptable reason for not meeting the letting condition.

To qualify for the period of grace election, the property must have met the letting condition in the previous year. The period of grace election can be made for up to two consecutive years, so for both 2020-21 and 2021-22 if necessary, which could be useful if the business did or does not recover quickly. However, if the property does not qualify as an FHL after two consecutive period of grace elections, it will cease to qualify as an FHL thereafter, until it meets the conditions again.

It is also possible to combine both the period of grace and averaging elections to ensure a property continues to qualify as an FHL.

Due to reduced turnover and increased costs, many FHL businesses may have made a net tax loss in 2020-21. This loss can only be carried forward and offset against future profits from the FHL business and cannot be offset against other income or other UK property business profits.

However, where the FHL did not meet the qualifying criteria for 2020-21, for example, and neither a period of grace nor averaging election is made, losses incurred in 2020-21 will be treated as regular UK property business losses.

• Jenny Healy is a partner at Saffery Champness and a member of the firm’s landed estates and rural business group.