The coronavirus pandemic has adversely impacted many sectors of business. The tourism and hospitality sector is certainly among them.
If you are the owner of a holiday home, then 2020 may have been a difficult year so far – with the sun shining and two bank holidays ‘missed’ during the lockdown you may be concerned that your holiday home will fail to produce the expected income you desire. Very few will also worry themselves about whether the property will now meet the definition of a furnished holiday letting (FHL) for tax purposes, but this may be just as big an issue. In this blog, we briefly discuss the tax outlook for FHLs and what reliefs may be available to help you.
Over recent months the Government announced a wide range of measures to help businesses throughout the pandemic. Many of these do not apply to an FHL unless the holiday letting business is very large. For example, the Self-employment Income Support Scheme will only be available to holiday businesses which are large enough that the owner reports the income on the self-employment pages of the tax return (most landlords will report on the land and property pages). The Coronavirus Job Retention Scheme may apply to a larger FHL business which employs staff on employment contracts, but again this will be rare.
The main relief available to FHL owners, therefore, is the deferral of the July 2020 payment on account of income tax. If you were due to make a payment on account for 2019/20 on 31 July, then this can be paid up to 6 months late without incurring penalties or interest charges.
Reliefs specifically for FHLs
For a holiday letting to be treated as an FHL for tax purposes, there are several conditions to be met which include the property being available to let for at least 210 days in a tax year and actually let for 105 of those days. More information on this can be found in our guide.
These day counting tests already come with two reliefs which may prove useful at this difficult time:
Period of grace election – this applies where the property has been let for at least 105 days in 2019/20. The following two years can then be treated as if the 105-day test has been met providing there was a genuine intention to meet the letting condition.
Averaging election – this applies where the landlord owns more than one holiday home and allows for the number of days of actual letting to be averaged across some or all of the properties. This may be useful where one FHL has had a high number of letting days, and another has had very little.
These reliefs may ensure that your holiday letting continues to be treated as an FHL for the 2020/21 tax year. Retaining the FHL status can ensure the following tax benefits are kept:
- The ability to claim capital allowances on certain expenditure, such as expensive furniture
- The treatment of profits as earnings for pension contribution purposes
- The potential for relief from inheritance tax to be claimed (although this is a complex area)
- The ability to claim entrepreneurs’ relief (recently renamed ‘Business Asset Disposal Relief’) on the sale of an FHL property
The final tax benefit is perhaps the most significant – claiming entrepreneurs’ relief on the sale of a property can reduce the tax rate from 28% to 10% on the gain made. This relief is subject to several conditions and has been revised several times in recent years. Perhaps one of the most significant changes is that the FHL business must have operated for at least two years before the sale. Therefore, if you are considering the sale of your FHL business in the near future then ensuring the property continues to meet the conditions and for the pattern of occupation to remain compliant with the requirements to be an FHL through this difficult time is vitally important.
One final point to note is that the regime for reporting capital gains on UK residential property and paying the tax to HMRC has changed. Where a gain has been made, and tax is payable a return must be filed with HMRC within 30 days of conveyance. More information about this change can be found in our guide.
Price Bailey has specialists in property tax planning and will always be available to help you in this area.
This blog was written by Michael Morter, a Senior Manager at Price Bailey. If you require any questions relating to inheritance tax planning, please contact Michael on the form below.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.