Different tax rules apply to income from letting property, which is generally taxed under the property income rules. For many years, the Furnished Holiday Lettings (FHL) rules allowed holiday lettings of UK properties that met certain conditions to be treated as a trade for some specific tax purposes.
The property must be situated in the UK or elsewhere in the EEA. The EEA comprises the 27 states in the EU plus Iceland, Liechtenstein and Norway.
Where there are properties in the UK and the EEA, they are to be treated as two separate property businesses with parallel provisions.
Accommodation is â€˜furnishedâ€™ if the visitor is entitled to the use of furniture. There should be sufficient furniture provided for normal occupation.
The business must be carried on commercially. â€˜Commerciallyâ€™ means let on a commercial basis and with a view to making a profit. Close season lettings may produce no profit but normally help towards the cost of maintaining the property. This letting can still be treated as commercial. On the other hand, lettings to friends or relatives at zero or nominal rents are not commercial.
After you have decided that your accommodation meets these criteria you will need to see if the property then passes the qualifying tests:
Availability. The property must be available for commercial letting as holiday accommodation to the public for at least 210 days during the relevant period;
Letting. The property must be commercially let as holiday accommodation to members of the public for at least 105 days during the relevant period. A letting to the same person for longer than 31 continuous days (a period of longer term occupation) is not a letting as holiday accommodation for the purposes of this condition; and
Pattern of occupation. Total periods of longer term occupation must not exceed 155 days during the relevant period.
Effect of meeting the conditions
Holiday lettings that meet the relevant conditions can be treated as a trade for the following purposes:
- Entitlement to plant and machinery capital allowances on furniture, white goods etc in the let property as well as on plant and machinery used outside the property (such as vans and tools). There are no capital allowances for the cost of the property itself or the land on which it stands;
- Certain capital gains reliefs (including business asset roll-over relief, Entrepreneursâ€™ Relief, relief for gifts of business assets, relief for loans to traders); and
- Profits count as relevant UK earnings when calculating the maximum relief due for an individualâ€™s pension contributions.
Losses from an FHL business may only be carried forward against future profits from the same business. This means that profits and losses of a UK FHL and an EEA FHL need to be calculated separately.
Holiday lettings where the property is situated outside the EEA do not qualify under the FHL rules. Instead, they are taxed under the normal property income rules.
There are three possible 12-month periods that may count as relevant periods for a FHL property:
- starting 12 months beginning with the day on which it is first let as furnished accommodation
- ceasing 12 months ending with the last day on which it is let as furnished accommodation
- continuing: if neither of the above apply, the tax year itself.