Navigating the Furnished Holiday Lettings Rules During Economic Challenges

In the current economic climate, landlords of furnished holiday lets (FHLs) may find it challenging to meet the occupancy requirements due to a decrease in holiday bookings. Understanding how to navigate the FHL tax rules, including the use of a ‘period of grace election’, is essential for maintaining FHL status for tax purposes.

Basic FHL Occupancy Conditions

To qualify as an FHL for tax purposes, a property must be in the UK or the EEA and sufficiently furnished for normal occupation. It must also meet three occupancy tests:

  1. Pattern of Occupation Condition: The total of all lets exceeding 31 days must not surpass 155 days in the year.
  2. Availability Condition: The property should be available for letting for at least 210 days in the tax year.
  3. Letting Condition: It must be actually let for at least 105 days in the tax year.

Utilising a Period of Grace Election

If you fail to meet the letting condition in a particular year, you can opt for a ‘period of grace election’. This option is viable if you intended to meet the letting condition but were unable to, possibly due to factors like the cost of living crisis.

To make this election, you must still meet the pattern of occupation and availability conditions. Also, the letting condition should have been met in the year preceding the first year you wish to make the election. If the letting condition isn’t met in the subsequent year, you can make a second period of grace election. However, failure to meet the condition in the fourth year, even after two grace periods, disqualifies the property as an FHL.

For instance, if the property met the letting condition in 2022/23, you can make a grace period election for 2023/24 and 2024/25, provided the other two conditions are satisfied. The letting condition must be met again in 2025/26 for the property to retain its FHL status.

Deadline for Grace Period Election

For the 2023/24 tax year, a period of grace election must be made by 31 January 2026.

Averaging Election for Multiple FHLs

If you own more than one FHL and meet the letting condition for some but not all properties, you can consider an ‘averaging election’. This means the letting condition is deemed met if, on average, the holiday lets are rented out for 105 days in the tax year. For example, if you have three FHLs, they need to be let for a total of at least 315 days to meet the condition across all properties.

Understanding and utilizing these options can help FHL landlords maintain their tax benefits during challenging economic times. Always consider consulting with a tax professional for personalised advice tailored to your specific situation.

 

 
 
 
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