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French Duncan

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Furnished Holiday Lets – Income Tax and Capital Gains Tax

Income Tax
Furnished Holiday Lets (FHLs) are not currently affected by the government’s changes to relief on mortgage interest, which were introduced on 6 April 2017. Owners of FHL’s can still claim 100% relief on their mortgage interest against their income, as opposed to the traditional landlord where the relief is gradually restricted to a 20% tax reducer.

This can prove very beneficial where you are a higher or additional rate taxpayer.  As such, ensuring that the qualifying conditions for FHL are met is crucial.

FHL’s have gone unaffected by the removal of Wear and Tear allowance as relief for furniture, which again will be adversely affecting normal landlords.   With FHL’s, equipment and fixtures are instead claimed through Capital Allowances. A standard long term rental property will now only get relief when replacing items of furniture, whereas relief can be claimed for the initial furnishing of an FHL property.   

Profits from an FHL also count as relevant earnings for pension contribution purposes, meaning that the level of tax efficient pension contribution you can make in a year may increase.

Capital Gain Tax (CGT)
The general treatment of Capital Gains for the gain on a sale of a rental property is for the individual to be liable to tax at either 18% or 28% depending on their other income in the tax year.

A key benefit of FHL’s is that there is potential for Entrepreneurs’ Relief (ER) to apply if it can be established that the sale is linked to the sale of whole or part of a business, or its cessation.  Where ER applies CGT is payable at 10% rather than the higher rates above.  Clearly an added advantage again on meeting the qualifying conditions for a FHL.

A property qualifying as a FHL may qualify for Rollover relief meaning that if all of the proceeds can be reinvested in other qualifying business assets, and the gain will not be realised until these assets are ultimately sold.  This is on the basis that certain conditions are met.

In addition to Rollover relief, FHLs can be regarded as business assets for the purposes of Gift/Holdover relief.  Again this will be subject to certain conditions being met but the effect is that if an FHL is gifted to another party, any gain on it may be able to be held over.  This relief can prove beneficial for Inheritance Tax (IHT) purposes where a parent is looking to pass assets to their children but is averse to suffering tax on the transfer.

There is a great deal of information to digest when managing a FHL and as such taking professional tax advice is essential.

If you are looking for advice relating to your FHL, please contact French Duncan Tax Senior Jen Kinnear either by email to j.kinnear@frenchduncan.co.uk or call 01786 451 745.

This blog is part of a series of eight, you can see all other blogs here:

1. Furnished Holiday Lets - an introduction & your obligations

2. Furnished Holiday Lets - qualifying conditions & elections

3. Furnished Holiday Lets - Non Resident Landlords

4. Furnished Holiday Lets - VAT

5. Furnished Holiday Lets - Making Tax Digital

6. Furnished Holiday Lets - Inheritance Tax

7. Furnished Holiday Lets - Conclusion & Services

 

Employee wellbeing - strategies for employers

This blog was previously published on LinkedIn on 14th February 2018.

Two recent surveys have highlighted the extent of stress in the workplace. The research found more than two-thirds of employers have seen an increase in reported instances of stress and mental health-related illnesses, whilst over a quarter of employees go into work when they are suffering from stress, anxiety or depression.

However, there was a marked growth in corporate wellbeing programmes last year, with most employers considering themselves responsible for influencing their employees’ health behaviours. The number of organisations with designated funding for their health and wellbeing programmes has also increased, with many having a specific budget in place. This has contributed to more employers offering health programmes, for instance to encourage weight loss, and to help people stop smoking or get more exercise.

More organisations are also embracing technology as part of their strategies, with considerable growth seen for health apps and virtual GP services. This trend is expected to gain pace in 2018, as employee engagement strategies embrace technology.

Despite the good news, one worrying finding was that many employees still go into work when they are ill. Reasons given by employees for going to work when ill include: 

• feeling that they had too much work to do;

• worrying about the burden of their absence on their team;

• anxiety about job security. 

Whatever the reason, a doctor’s advice to stay at home is often ignored. This can be counterproductive, because early diagnosis and treatment improve the chance of a faster recovery, avoiding long-term absences from work. Wellbeing should be a cornerstone of any workplace health policy and promoting the importance of listening to medical advice is a key part of that.

Furnished Holiday Lets - qualifying conditions & elections

To gain the tax advantages of a Furnished Holiday Let (FHL), the property must qualify, and HMRC have a series of qualifying conditions which must be met.

If the criteria is still not met, the property will be treated as a buy-to-let property and taxed accordingly.  As such the benefits associated with an FHL would be lost.

As well as the requirement that the FHL is located in the UK or European Economic Area (EEA) and must be furnished to a standard sufficient for normal occupation, the three main qualifying conditions are:

  • Be available for at least 210 days in the tax year
  • Be let commercially to the public for at least 105 days in the tax year
  • Not be let for more than 155 days in a tax year for periods of 31 continuous days or more.

Private use of the property, to include use by friends or family at a lower than market rate, should also be taken into consideration, and claims for expenses adjusted accordingly.

If you do not manage to reach the 105 day letting condition, there are elections available if more than one property is owned, or if your property reaches the threshold in some years but not others.

Averaging Election

The individual can make an averaging election where:

  • there is more than one property
  • some properties meet all three conditions and some fail the letting condition (i.e. let commercially for at least 105 days in the relevant period) only

The averaging election can be made to average out the let days with respect to properties specified in the election.  If the average number of days let is over 105 then all the properties are deemed to meet the letting condition.  The election applies for the tax year in question only.

Please note that it is not possible to average lettings of UK FHLs and EEA FHLs. They must be treated separately and be subject to separate elections, where appropriate.

There are also specific time limits, which apply when wishing to make an election.

Period of grace election

The second provision is known as the ‘period of grace’ election. This election applies where all three conditions were met in a tax year, but in the following tax year and the tax year after the letting condition is not met despite a genuine intention to let the property for at least 105 days in the tax year.

An example of when this could happen is where the taxpayer marketed a property to the same or a greater level than in successful years, or where lettings are cancelled due to unforeseen circumstances.

The period of grace election allows the property to qualify as a FHL by deeming the letting condition to be met, as long as the other two main conditions are met for the tax year (i.e. the pattern of occupation and availability conditions).

This election can be very useful where the taxpayer only has one FHL property.

Due to the complexity with the elections and making claims advice should always be taken from an expert to ensure you are being compliant with the rules. If you are looking for advice relating to your FHL, please contact French Duncan Tax Senior Jen Kinnear either by email to j.kinnear@frenchduncan.co.uk or call 01786 451 745.

This blog is part of a series of eight, you can see all other blogs here:

1. Furnished Holiday Lets - an introduction & your obligations

2. Furnished Holiday Lets - Income Tax & Capital Gains Tax

3. Furnished Holiday Lets - Non Resident Landlords

4. Furnished Holiday Lets - VAT

5. Furnished Holiday Lets - Making Tax Digital

6. Furnished Holiday Lets - Inheritance Tax

7. Furnished Holiday Lets - Conclusion & Services

 

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