Tax considerations for furnished holiday lets

Senga Prior

Senga Prior

Tax Senior Manager

08 August 2021

This article first appeared in Scottish Farming Leader, NFU Scotland’s members’ magazine.

A popular way for farmers to generate additional income is the letting of excess farm cottages as furnished accommodation on short-term lets, also known as furnished holiday lets (FHLs). Some have gone even further, building bespoke cottages or cabins.

These FHLs have several tax advantages over longer term lets, such as:

  • Capital allowances can be claimed on furniture rather than only replacement expenditure being deductible.
  • FHL profits are classed as relevant earnings for pension contributions.
  • Mortgage interest relief is not restricted for FHLs. For long term lets the relief is restricted to 20%.
  • Profits can be split in a different ratio to the beneficial ownership.

It is important to be aware that FHL income is standard rated for VAT.

In certain circumstances, some capital gains tax reliefs may be available; namely, Business Asset Disposal Relief, Hold Over Relief and Roll Over Relief.

For accommodation to qualify as an FHL, it must meet the following conditions:

  • Available for 210 days in the year (any periods of owner use are excluded).
  • Commercially let for at least 105 days in the year not including:
    • occupation by friends or family at a non-commercial rate
    • any period of occupation of over  31 days by same person
  • The total of all lets of over 31 days must not exceed 155 days in the year.

Due to COVID-19 restrictions, many landlords may be concerned about meeting these conditions. There are two elections available that may help.

The averaging election allows landlords with multiple FHLs to average occupancy across all properties.

The period of grace election can be used where there was a genuine intention to let but due to unforeseen circumstances this was not possible. The property must have met the FHL conditions the year before the first year of election. A second election is possible the following year.

Finally, as FHLs are residential property, they are subject to the new 30-day capital gains tax (CGT) regime. This means that an online return may be required within 30 days of completion of sale/gift.

The tax rules for FHLs can be complicated, and we recommend consulting your tax adviser to ensure you are fully aware of all the implications. 

For more information, please don't hesitate to contact me or another member of our Rural team.

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