From Bowness and Windermere, through Ambleside and Grasmere, and on up to Keswick, the Lake District is an ever popular tourist destination, and therefore home to many quality ‘holiday accommodation businesses’ (HABs). The good news for owners of these businesses is that despite the tax increases aimed at curbing investment in the Residential ‘Buy to Let’ market (BTLs), owners of HABs have not been impacted too badly, at least to date. The following is a brief summary of the current rules.
Furnished Holiday Lets (FHLs).
FHL owners benefit from the following special tax advantages on their FHL investment and profits:
1. There is no restriction of tax relief for finance costs associated with the property
2. Capital allowances can be claimed on capital expenditure
3. The Capital Gains Tax rate payable on the sale of FHLs can be as much as 18% lower than on sale of a BTL
4. Alternatively, Capital Gains Tax can be indefinitely deferred by ‘rolling over’ the proceeds of sale of an FHL into ‘qualifying’ new assets, or ‘held over’ until subsequent sale if the property is gifted (eg, down the generations)
None of the above advantages apply to BTL owners, but to attract these very generous tax reliefs you must first meet strict conditions.
Firstly, your property must be situated in the UK, it must be furnished for ‘normal occupation’, and it must be let out with a view to making a profit. In addition, there are 3 ‘occupation’ conditions that must be met:
1. The FHL must be available for the general public to rent on ‘short term’ lets for a minimum of 210 days per annum. ‘Short term’ means 31 days or less.
2. A period of ‘long term occupation’ is defined as any period between 32 and 155 days. If all periods of ‘long term occupation’ exceed 155 days in total in the year the property cannot qualify as an FHL.
3. The property must (usually) be actually let out (ie, not merely be ‘available’) for at least 105 days. However, this rule is relaxed if the 105 days condition was met in the previous year, or, in cases of multiple FHL portfolios, where the total number of let days for all FHLs/ number of FHLs exceeds 105 days.
Other Holiday Accommodation Businesses
An HAB which also qualifies as a ‘trade’ (eg, hotels, bed & breakfast establishments) may also be eligible for:
a) ‘Business Property Relief’, which can reduce any Inheritance Tax payable on the property to NIL (either on a gift during your lifetime or on death).
b) ‘Income Tax Loss Relief’, whereby any losses you make on your HAB can be offset against any other income you have (in order to reduce the tax payable on that other income).
However, to access these additional tax reliefs you will need very good evidence to show that your customers are not simply paying for ‘use of land/buildings’, but are paying for a ‘package of services’ (including the provision of accommodation) which together constitute a ‘trade’.
Be warned, these additional reliefs can be very valuable so HMRC will challenge them if they get the chance!
Finally, a common pitfall for owners of smaller HABs is to misunderstand their potential exposure to VAT.
It is important to remember that income from a HAB is within the scope of VAT (whereas income from a BTL isn’t). So, if the income from your HAB, added together with any other activities you engage in that are within the scope of VAT (eg, as a self-employed builder, accountant etc) , exceeds the VAT threshold, you must account for VAT on the income from ALL businesses to HMRC, even though each business on its own may be below the VAT registration threshold.
It may therefore be desirable to use different legal entities to mitigate your VAT liabilities.
Please call me (David Sutton) if you would like a free consultation to discuss accounting and tax options for your business.