A Furnished Holiday Let (‘FHL’) is a funny beast. It is a residential property, yet if certain criteria are met, it is also treated as a trading asset. If a property is in the UK or EEC, furnished, available for let for 210 days a year and actually let out for 105 with no long term (i.e. 31 days+) lettings, it will count as a trading asset for income tax and capital gains tax (CGT) purposes. There are allowances for averaging and grace periods in case you fail to meet the ‘actually let’ criterion. This means the income from the let is pensionable (i.e. it will count as income when considering how much one can invest in a pension whilst claiming tax relief), capital allowances will be available for plant and machinery purchases and the trading-business/asset CGT reliefs (e.g. Entrepreneurs’ Relief, gift holdover, rollover etc) will be available.
In certain parts of the country, like my native Westcountry, or the Lake District or indeed any tourist hotspot, these lets can be very lucrative and the tax benefits attached to it just make it more attractive. Farmers, looking to diversify into alternative trading activities, could do worse than utilising residential properties on the farm as FHLs.
Residential properties could potentially be let on Assured Shorthold Tenancies (ASTs) on a longer-term basis and yield a steady income, but such assets would be investment by nature and thus not qualify for CGT and IHT reliefs as well as potentially causing issues with VAT – investment assets generally being exempt unless an Option to Tax (OTT) is made. Staying on an active farm in lovely rolling countryside can be an alluring holiday to many an urban-dweller and ensure that a non-farming asset can at least keep trading status for tax purposes and yield at least a great seasonal income.
Issues with holiday lets
There have been several issues with holiday lets. In places like Cornwall, where the number of second homes vacant for 40 weeks or so a year is causing villages like Mousehole, Mevagissey, St Ives and Port Isaac to be ghost towns in the winter, people have been paying council tax on these empty properties by claiming they are holiday lets which, as trades, pay business rates instead. Genuine FHLs should indeed only pay business rates but when the system is abused like this (or perceived to be) it adds to already simmering local resentment.
The issue from a tax perspective is Inheritance Tax (IHT) and the availability of Business Property Relief (BPR) to effectively remove the value of the let from someone’s estate. Whilst meeting the above occupation criteria will allow trading status for income tax and CGT purposes, that alone will not suffice for BPR where the business must not be wholly or mainly investment in nature.
Court decisions – level of service
Several court decisions – Pawson, Green and Ross have denied BPR to holiday lets on the grounds that the services provided were no more than you’d expect from a self-catering property and are still essentially passive investment assets. To obtain BPR the level of services provided in addition to mere accommodation must be high – more akin to a hotel than a self-catering let. In the Joyce Graham case, four holiday lets on an Isle of Scilly farm were afforded BPR by the First Tier Tribunal on appeal from HMRC’s refusal of the relief. The deceased and her daughter were working c.200 hours a week between them during peak season, had a swimming pool and vast leisure facilities and it was the ‘personal touch’ by them which gave their customers grounds to comment on the level of additional services provided by their hosts (showing them around, taking shopping orders e.g.). The Joyce Graham case is fairly exceptional in the level of services provided but it is useful to read to get an idea of the sort of set up the courts would expect to see when allowing a BPR claim.
The upshot is that for almost all tax purposes, an FHL is a trade asset (indeed a trade in itself). It can be a very useful and profitable income source using an asset which would otherwise be a toxic investment asset or an otherwise very expensive and burdensome one to maintain were it to be let out permanently.
However, for IHT purposes HMRC and the courts have taken the view that to qualify for BPR the level of additional services provided must be substantial, thus potentially making the venture prohibitive or not worth the extra hassle. It is impossible to say precisely what services you would need to provide as each case will be different, but putting in the hours of a full-time job in peak season and a resemblance closer to that of a hotel than a traditional self-catering let would appear to be a good start.