Times have been getting tougher for landlords in the buy to let market. One major factor here has been the restriction in the allowability of finance costs for tax purposes being phased in between 2017/18 and 2020/21. But there are always options in the world of business, and one potential option for the buy to let investor is to diversify into the market for furnished holiday lettings (FHLs).
The FHL market offers some important tax advantages. The finance cost restriction, for instance, does not apply to landlords of FHLs.
Items such as furniture, equipment and fixtures will be covered by capital allowances as plant and machinery. This is another contrast with the buy to let market, where capital expenditure is not allowable for tax, although there may be relief when certain items are replaced. Pension planning is another plus point, as profits from an FHL business can count as earnings for pensions purposes. The tax treatment of losses can also be advantageous.
FHLs are treated as a trade, rather than an investment. This means capital gains tax reliefs such as Business Asset Rollover Relief and Entrepreneurs’ Relief can be claimed, and it may be possible to get relief on gifts of business assets and relief for loans to traders.
But what about one key inheritance tax break for owners of businesses – business property relief (BPR)? BPR is an inheritance tax relief which can help with succession planning, potentially reducing the taxable value of a transfer of relevant business property by 50% or 100%, depending on the type of property involved. In some circumstances, FHLs can provide access to BPR, although succeeding with a claim for BPR may be difficult. To qualify, it is necessary to provide a substantial level of service in addition to the holiday accommodation. A case where a taxpayer recently won the claim shows how high the hurdle can be.
In this case, holiday accommodation in four units in and adjoining the owners’ house in the Scilly Isles was provided. Guests could make use of the croquet lawn, relax in ‘exceptionally well designed’ gardens, or take advantage of a games room, sauna, laundry, swimming pool, golf buggy and bicycles. They were invited to use herbs from the garden to cook with, or take tomatoes from the greenhouse. There wasn’t just a barbecue area – the owner would organise barbecues for the visitors. There wasn’t just a welcome pack on arrival – the owner would regularly go shopping for crab and fresh fish for guests.
The judge commented that it was the ‘personal care lavished upon guests’ which distinguished it from the majority of FHLs. It was, the tribunal said, comparable to a ‘family run hotel’.
There are detailed rules to keep an eye on in order to access the tax advantages of FHL status. They cover things like the location of the property – which must be in the UK or European Economic Area – and specify what ‘furnished’ means. There are also very stringent requirements regarding occupancy. It is essential to pay close attention to these to benefit from the FHL regime.
We would be happy to review your property portfolio with you to make sure that your affairs are structured efficiently.
This publication has been prepared by Robinson Reed Layton LLP. It is to be treated as a general guide only and is not intended to be a comprehensive statement of the law or represent specific tax advice. No liability is accepted for the opinions it contains, or for any errors or omissions. All rights reserved.