You own and let several holiday lodges but you are now approaching retirement and are planning to sell off the properties in the next few years. Could coronavirus cause a nasty tax trap for you and how can you avoid this? Stuart Hair takes a closer look.
If your properties qualify as furnished holiday lettings (FHLs), then the properties can benefit from a number of tax benefits not usually available to rental businesses.
In the context above, the relief that is relevant is the entitlement to claim business asset disposal relief (BADR) on a sale. To qualify as an FHL, a property must be available to let by the public for at least 210 days in a tax year and actually be let for at least 105 days. Lettings of more than 31 consecutive days to the same tenant must not exceed 155 days.
If someone rents the property for less than 31 days but stays longer only because of unforeseen circumstances, such as because they or a family member is self-isolating due to coronavirus, then you can count this as meeting the FHL conditions.
However, if you are considering selling the properties to help fund your retirement, the timing of this could cause an unexpected tax trap. Because holiday accommodation operators have had to close due to the pandemic, there is a risk that the availability or letting condition outlined above won’t therefore be met for 2020/21. This causes an issue because to qualify for BADR, the FHL status must have been met throughout the two years to disposal, or to cessation in the case of an associated disposal. The difference in tax can be up to 18%, which could have a huge impact on your retirement plans.
Fortunately, there is a simple election that can alleviate this problem, the so-called “period of grace” election permitted by s.326A Income Tax (Trading and Other Income) Act 2005.
The election means that if the property qualified as an FHL in a previous tax year, up to two non-qualifying years can be deemed to be qualifying if there was a genuine intention to meet the conditions and the property has been let for some days during the period. If this applies to you, be sure to make the election on the 2020/21 tax return when you come to file it.
If the strict letting conditions required to preserve your FHL status aren’t met this year, you might lose out on business asset disposal relief, potentially costing you up to 18% in tax. If this happens, you should use the period of grace election to preserve FHL status.