Recent changes to the rules on allowable costs have led to tougher times for buy-to-let landlords. But in business there are always opportunities… one option for buy-to-let investors could be to diversify into furnished holiday lettings (FHLs).
Pressures on landlords operating in the buy-to-let market have been increasing. This is largely due to changes, phased in between 2017/18 and 2020/21, restricting the types of finance costs that are allowable for tax purposes. Conditions are not set to get any easier but one option for investors in the buy-to-let property market could be a move into furnished holiday lets (FHL).
Furnished holiday lettings offer some important tax advantages for landlords. The finance cost restriction, for instance, does not apply to FHLs.
Items such as furniture, equipment and fixtures are classed as plant and machinery and will be covered by capital allowances. This compares very favourably with the buy-to-let market, where capital expenditure is not allowable for tax (although there may be relief when certain items need to be replaced).
Profits from an FHL business can be counted as earnings for pensions purposes – another valuable plus point.
The tax treatment of losses for FHL can also be beneficial as FHLs are treated as a trade, rather than an investment. This means that landlords can claim Capital Gains Tax reliefs such as Business Asset Rollover Relief and Entrepreneurs’ Relief. It may also be possible to get relief on gifts of business assets as well as on loans to traders.
Inheritance Tax breaks
You may be wondering what the situation is with the key Inheritance Tax break for owners of businesses, Business Property Relief (BPR). BPR is an Inheritance Tax relief which can help with succession planning. It can potentially reduce the taxable value of a transfer of relevant business property by 50% or 100%, depending on the type of property. In some cases, FHLs can provide access to BPR but making a successful claim may prove difficult. To qualify for BPR, it is essential that the landlord can demonstrate that a substantial level of service has been provided, in addition to the holiday accommodation itself.
A recent case, which went in favour of the taxpayer, illustrates just how high the hurdle can be. The holiday accommodation in question comprised four units in and adjoining the owners’ house in the Scilly Isles. Guests were welcome to make use of a croquet lawn, relax in the ‘exceptionally well designed’ gardens, and take advantage of a games room, sauna, laundry, swimming pool, golf buggy and bicycles. They were also invited to take tomatoes from the greenhouse and herbs from the garden to eat and cook with. Rather than simply providing a barbecue area, the owner would organise barbecues for the visitors. And, on the guests’ arrival, the owner would regularly buy crab and fresh fish for guests.
The judge, in explaining his decision, commented that the “personal care lavished upon guests” distinguished this property from the majority of FHLs. The tribunal likened it to a “family run hotel”.
Landlords must pay attention to detailed rules in order to access the tax advantages of FHL status. They cover aspects such as the location of the property – which must be in the UK or European Economic Area – set out a clear definition of the term ‘furnished’, and include very stringent requirements on occupancy.
For information of users: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.