When it comes to renting out properties, furnished holiday lettings (FHLs) offer distinct tax advantages compared to residential lets. In particular, FHL businesses can access various capital gains tax (CGT) reliefs that are typically available to traders. In this article, we’ll explore these advantages and shed light on how you can leverage them to optimize your tax position.
Qualifying as a Furnished Holiday Letting (FHL)
To benefit from the CGT reliefs, your property must qualify as an FHL. This means it must be a furnished property commercially let with the intention of making a profit. Additionally, it must satisfy the following occupancy conditions:
Lettings exceeding 31 consecutive days must not exceed a total of 155 days in the tax year.The property must be available for letting as furnished holiday accommodation for at least 210 days in the tax year.The property must be let commercially for at least 105 days in the tax year.
In cases where individuals have multiple holiday lets, the third condition can be met on average across all properties through an averaging election. If the conditions are not met for a particular year but have been met previously, a ‘period of grace’ election may allow the property to be treated as an FHL.
Capital Gains Tax Advantages of FHLs
Roll-over relief offers significant benefits when selling one FHL and reinvesting in another. This relief allows the gain from the sale of the furnished holiday let to be deferred and “rolled over” into the new property. Consequently, the base cost of the replacement FHL is reduced by the gain, postponing the tax liability. The gain will be realized when that property (or a subsequent property) is sold without being rolled over into a replacement asset.
Business Asset Disposal Relief: Favorable Tax Rates
Another notable advantage of FHLs is the ability to benefit from business asset disposal relief. If the qualifying conditions are met, landlords can enjoy a favorable CGT rate of 10% on lifetime gains up to £1 million when selling the property after the business has ceased. In contrast, landlords with residential lets would face a CGT rate of 28% as higher rate taxpayers. The primary qualifying condition is that the landlord owned the business or was a partner for at least two years leading up to the business cessation.
Gift Hold-over Relief: Deferring the Gain
Hold-over relief is available when gifting an FHL property, deferring the gain until the recipient disposes of the property. This relief can be advantageous for succession planning purposes, especially when gifting the FHL to children. The base cost of the gifted property is reduced by the held-over gain.
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