Last tax year you started letting a property as a holiday let. The trouble is that to qualify for the special tax breaks it must be let for 105 days in the tax year and you didn’t reach this figure. Is there a way around this rule? Brona MacDougall takes a closer look.
You may already be aware that if you own a residential property which you let out for short periods, i.e. less than 31 days at a time, there are tax advantages compared to properties which are let for longer periods. For example, more generous tax relief for the cost of furniture and equipment and extra capital gains tax reliefs. HMRC calls these furnished holiday lettings (FHLs) but special rules apply regardless of why the tenants rent them and to qualify as an FHL there are conditions which must be met.
To qualify as a furnished holiday letting (FHL), the following conditions must be met:
• The property must be let on a commercial basis.
• It must be furnished sufficiently to allow tenants to use the property like a home.
• During a tax year the total number of days where the property is let for periods of more than 30 days must not exceed 155.
• It must be available to let for at least 210 days per tax year and actually let (for periods of 30 days or less) for 105 days.
When you first start letting a property the 105 day condition can be difficult to meet. Just like any other type of business, it can take time to get a furnished holiday letting established and this can mean that you might miss out on the special tax breaks.
However, the rules do allow some leeway for start-up FHLs, instead of the 155, 210 and 105 day-limits applying for the tax year they apply to the first twelve months of letting.
Jack and Susan own a second home which they first let as holiday accommodation from 1 August 2019. Their first booking was for seven days from 18 August. They made short-term lets for another 60 days between the first let and the end of the tax year; a total of 67 days for 2019/20. This doesn’t meet the 105 day condition. However, they can take into account lets up to 17 August 2020, i.e. the first twelve months. They let the property for 60 days in that period making the total let days in the first twelve months 127 – over the qualifying threshold.
Please note, the periods of letting between 6 April and 17 August 2020 also count towards the other limits for 2020/21.
By establishing the first tax year as an FHL you can use this to extend the qualifying period for the next two tax years even if by themselves the 105 day conditions aren’t met. This is achieved by making a special claim known as a period of grace election.
As meeting the FHL letting condition for the first twelve months is important, to start with it might be worth registering your property with a letting agency or holiday company to increase your chances of obtaining FHL status.
While the 105 day rule usually applies for each tax year, it’s different the first time you let a property. Instead, the number of days is measured over the first twelve months of letting. Once this first condition is met, the tax breaks can continue for another two years even if the 105-day rule isn’t met in those years.
As you will see, when it comes to taking full advantage of tax breaks for holidays lets, it really does pay to read the small print so that you fully understand the conditions.
For further advice on this or any other property letting issue, please do not hesitate to get in touch with one of the team at JRW.