Furnished holiday lettings

Prop­er­ty own­er­ship has a num­ber of dif­fer­ent tax impli­ca­tions, not to men­tion the com­plex rules regard­ing Fur­nished Hol­i­day Let­tings. Rus­sell & Rus­sell can guide indi­vid­u­als in the Lanark­shire area through the leg­is­la­tion, whilst help­ing to min­imise their poten­tial tax lia­bil­i­ty.

NOTE: The Fur­nished Hol­i­day Let­tings regime is being abol­ished from 2025/26. Min­i­mal details of the abol­ish­ment have been pro­vid­ed. This fact­sheet will be updat­ed in due course.

Dif­fer­ent tax rules apply to income from let­ting prop­er­ty, which is gen­er­al­ly taxed under the prop­er­ty income rules. The Fur­nished Hol­i­day Let­tings (FHL) rules allow hol­i­day let­tings of UK prop­er­ties that meet cer­tain con­di­tions to be treat­ed as a trade for some spe­cif­ic tax pur­pos­es.

Qualifying conditions

The prop­er­ty must be sit­u­at­ed in the UK or else­where in the EEA. The EEA com­pris­es the EU plus Ice­land, Liecht­en­stein and Nor­way.

Accom­mo­da­tion is ‘fur­nished’ 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. ‘Com­mer­cial­ly’ 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 (see below but usu­al­ly the tax year);

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, Busi­ness Asset Dis­pos­al 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 individual’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.

There is no restric­tion on the deductibil­i­ty of mort­gage inter­est incurred in rela­tion to the FHL busi­ness.

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.

Relevant periods

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.

Occupancy Threshold

There are two elec­tions you can make to help you reach the occu­pan­cy thresh­old. If you have more than one prop­er­ty the ‘aver­ag­ing’ elec­tion might be help­ful and if you have a prop­er­ty that reach­es the occu­pan­cy thresh­old in some years but not in oth­ers you could use a ‘peri­od of grace’ elec­tion to help you to reach the thresh­old.

As regards aver­ag­ing, where a per­son has a num­ber of units of accom­mo­da­tion that are let for hol­i­day pur­pos­es:

• each of them must sep­a­rate­ly sat­is­fy the avail­abil­i­ty con­di­tion and the pat­tern of occu­pa­tion con­di­tion, but
• if some are indi­vid­u­al­ly let for less than 105 days, the land­lord is allowed to apply the let­ting con­di­tion to the aver­age rate of occu­pan­cy of the units
• A unit can­not be used more than once in the same peri­od in a claim for aver­ag­ing treat­ment
• You can only aver­age across the prop­er­ties in a sin­gle busi­ness – you can­not mix UK and EEA prop­er­ties.

Period of grace

In addi­tion to the option to use aver­ag­ing to help meet the occu­pa­tion thresh­old there is also the pos­si­bil­i­ty of mak­ing an elec­tion for a ‘peri­od of grace’.

A peri­od of grace elec­tion allows you to treat a year as a qual­i­fy­ing FHL year where you gen­uine­ly intend­ed to meet the occu­pan­cy thresh­old but were unable to meet it. In order to qual­i­fy for this, the prop­er­ty must have reached the occu­pan­cy thresh­old in the pre­vi­ous year, either on its own or because of an aver­ag­ing elec­tion. If the prop­er­ty still does not meet the occu­pan­cy thresh­old in the fol­low­ing year, pro­vid­ing an elec­tion has been made for the ear­li­er year, this can also be treat­ed as a qual­i­fy­ing FHL year.

If the prop­er­ty still doesn’t meet the required let­ting lev­el in the fourth year (after two years of being treat­ed as qual­i­fy­ing) then that prop­er­ty is no longer an FHL prop­er­ty.

The prop­er­ty must meet the avail­abil­i­ty thresh­old (and the pat­tern of occu­pa­tion test). You must be able to show that there was a gen­uine inten­tion to let the prop­er­ty in the year for which a peri­od of grace elec­tion is made. For exam­ple, where you have mar­ket­ed a prop­er­ty to the same or a greater lev­el than in suc­cess­ful years this might be used as evi­dence of a gen­uine inten­tion to let.

If the let­tings are can­celled due to unfore­seen cir­cum­stances, for exam­ple, because of extreme adverse weath­er con­di­tions or an out­break of foot and mouth dis­ease, then it is like­ly that you would be able to say that there had been a gen­uine inten­tion to let.

If you have more than one FHL prop­er­ty, some­times both aver­ag­ing and peri­od of grace elec­tions may be used to ensure a prop­er­ty con­tin­ues to qual­i­fy.

Limited companies

The FHL pro­vi­sions apply to both indi­vid­u­als and com­pa­nies, although clear­ly many of them apply only to indi­vid­u­als. How­ev­er, cap­i­tal gains exemp­tion for dis­pos­als by com­pa­nies with sub­stan­tial share­hold­ings may also apply. Changes in pro­vi­sions for cor­po­ra­tion tax nor­mal­ly run with the finan­cial year (start­ing on 1 April) rather than the tax year (start­ing on 6 April), and the April dates men­tioned in the text should be read accord­ing­ly.

If you are in the Lanark­shire area and would like fur­ther help with Fur­nished Hol­i­day Let­tings, please con­tact Rus­sell & Rus­sell.