An FHL has a number of income tax reliefs, such as a greater amount (and variety) of expenditure to offset against its profits, as well as lower rates, or deferral, of capital gains tax upon a potential sale.
FHL can be apartments or houses located anywhere in the UK or even the European Economic Area. Many are situated in seaside towns, as well as cities, and are also listed on popular websites, such as Airbnb.
What are the qualifying criteria of an FHL?
In order for a property to be considered an FHL, the owner needs to fulfil a number of stringent conditions. They include, but are not limited to, a certain threshold of days that the property is let each year, and a further number of days that the property has to be available for letting. There are also certain patterns of occupation that must be observed, which include a maximum period any guest can stay in one visit.
Owners of an FHL therefore need to ensure their record keeping is robust, as, for example, a few days of under-occupation could put the FHL status (and thus tax reliefs) at risk. There are further reliefs to combat such under-occupation; however, these are less well known, and timing is key.
As a result of the significant drop in demand because of the lockdown, many properties are unlikely to be let for sufficient days in 2020/21 to qualify as an FHL. Some investors may find that the cancellation of bookings in March 2020 means they do not meet the occupancy thresholds for the 2019/20 tax year either.
How can you address the occupancy threshold requirements?
Investors in this position who met the letting criteria in the previous year can make a ‘Period of Grace Election’ as long as they have made a genuine effort to market their property. This election can be made for two years – so those who fell short of the required letting days in 2019/20 and fear they will not be able to let their property for sufficient days in 2020/21, can retain the FHL status for their properties. The election can be made on their tax returns, or separately to HM Revenue & Customs (HMRC).
Prior to COVID-19, UK seaside towns had been suffering due to the collapse of local industries, and, as a result relied on tourism. The final nail in the coffin, would be the very stimulators of tourism, owners of holiday letting properties, losing their FHL status, due to under-occupation and reviewing their investment strategy as a result. We would therefore recommend that all investors should review their bookings carefully and make this election where they are eligible if there is a shortfall in their letting days.
The issue of using holiday lets to support key workers
Good Samaritans have been letting out their holiday homes to NHS workers, such as doctors, who been relocated around the UK. Many construction workers working on sites away from home have also been renting FHL’s following the closure of hotels.
The issue here is not the under-occupation of an FHL, but the over-occupation of one. Another ‘trap’ causing the loss of FHL status is a prolonged period of occupation – defined as a stay of more than 31 days.
We would encourage HMRC to issue recognition of these issues and relax the occupancy rules in 2019/20 and 2020/21. We also advise all property owners of holiday lettings to continue keeping records of occupation, and who the occupiers are. If the Government were to relax the rules for say, over-occupation by key workers, owners may not only need to keep a day count, but also the occupant’s profession.
Would you like to know more?
If you wish to discuss how this could affect your business, please contact Heather Powell or your usual Blick Rothenberg partner.
Or if you would like to see more of our insights and guidance for the industry, please visit our Property & Construction Hub.