Furnished Holiday Lets – Income Tax and Capital Gains Tax

Jen Kinnear


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 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.

As well as reporting the disposal in your Self Assessment tax return, any disposals of UK residential property must be reported to HMRC via a UK property Capital Gains Tax return within 30 days of selling it.

A key benefit of FHL’s is that there is potential for Business Asset Disposal Relief (BADR), formally known as 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 BADR 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.

Please click here to read our latest blog on Capital Gains Tax and 30 days reporting for the disposal of UK residential properties - published 28th May 2021

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 Assistant Manager Jen Kinnear.

This blog is the third in a series - you can see the first two blogs:

1. Furnished Holiday Lets - an introduction & your obligations

2. Furnished Holiday Lets - qualifying conditions & elections

Click here to see Jen's profile and contact details.

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