Chris Thorpe explores the current position regarding furnished lets and their tax treatment
Normally, a property let out to tenants is an investment asset for tax purposes. However, if that property is a furnished holiday let (FHL) everything changes; the property is treated as a trading asset and the corresponding rents are regarded as trading receipts. Land rental will never normally be considered a trade, but this is an exception.
An FHL is a furnished property in the UK or EEA available for letting for at least 210 days per year and actually let for at least 105 days per year but with no long term lets (i.e. more than 31 days) over a155 day period. The 105 day criterion can be met through averaging with multiple properties, and‘periods of grace’ are available if trying times have meant the occupation rates are lower than expected. As a trading asset, it will also qualify for all the capital gains tax (CGT) reliefs, for capital allowances and the trading income is pensionable.
IHT and holiday lets
What about inheritance tax (IHT)? Historically, for IHT purposes FHLs have also generally qualified for 100% business property relief (BPR), but the IHT legislation is obviously different from that governing income tax and CGT.
BPR is denied if the business is wholly or mainly one of holding investments, and over recent years HMRC and the courts have held that FHLs are merely passive investments (i.e. land rental) and thus do not qualify. HMRC have argued that there are not enough services being provided by the owners to make the FHL an ‘active’ business; that ultimately it is purely land rental and it is a trade only by a fiction of income tax and CGT, with BPR demanding a degree of input by the owner worthy of an actual business.
The level of services
The case Ross v Revenue and Customs [2017] UKFTT 0507 illustrated this approach. That caseinvolved eight holiday properties; the business offered their guests all the check-in and hospitality services one would expect at a hotel (indeed it was a contracted hotel which provided those services!). However, that was still not sufficient for HMRC to regard the partnership as an active business worthy of BPR. Clearly, a high degree of active service by the owners is required such that the business in question resembles a hotel rather than a self-catering let.
A useful indication of the level of services required of a FHL to qualify was provided in The Personal Representatives of Grace Joyce Graham v Revenue and Customs [2018] UKFTT 0306. That case involved a business consisting of four flats on the Isle of Scilly. Four flats was only half the number inRoss, but the deceased and her daughter worked 200 hours a week between them during peak season – not only maintaining the swimming pool, sauna, herb garden and numerous leisure facilities, but also being at the beck and call of their guests and ensuring that the personal touch was so memorable that guests sang their praises on TripAdvisor.
It was evidence like this which persuaded the First Tier tribunal that sufficient blood, toil, sweat and tears was being put into this business by its owners and that it was indeed a business, not just land rental, and BPR should be granted to the deceased’s executors.
Practical tip
The law concerning FHLs has been the same for a while now; provided the availability and letting criteria etc. are met, they are treated as trades for income tax, CGT, pension and capital allowances purposes. But to qualify for BPR for IHT purposes, there needs to be something else on offer, whichturns it from a simple let property with tenants into an actual active business with happy guests and goodwill.
