So you took the plunge and ventured in to the furnished holiday let market and for most owners it has been an extremely profitable and enjoyable ride. The rise in FHL’s within inner cities, rural belts and coastal towns is currently on an upward trend with no signs of slowing. New investment into the short term holiday let market is mainly being fueled from buy to let landlords due to recent shifts in tax treatment and stamp duty which effectively leaves highly leveraged landlords in a negative cash flow position.
However, changing strategy to the FHL model turns the above on its head with the availability of a huge tax relief that is restricted for buy to let landlords.
This tax relief is called capital allowances (as you may already know) and can turn up to 45% of the property purchase price into a source of tax free income.
To qualify as a FHL your property must be in the UK or in the European Economic Area (EEA) - the EEA includes Iceland, Liechtenstein and Norway. It must also be furnished and let on a commercial basis intent on making a profit and meet the following;
1.The Pattern of Occupation
If the total of all lettings that exceed 31 continuous days is more than 155 days during the year, this condition is not met so your property will not be an FHL for that year.
2.The Availability Condition
Your property must be available for letting as furnished holiday accommodation letting for at least 210 days in the year.
3.The Letting Condition
You must let the property commercially as furnished holiday accommodation to the public for at least 105 days in the year. Do not count any days when you let the property to friends or relatives at zero or reduced rates as this is not a commercial let.
If you did not meet the conditions, Fear not and read on.....
In most cases FHL owners will usually hit the first two conditions with ease but some fall short on the letting condition. But fear not, you may still be able to qualify your property as a FHL and receive the benefits of capital allowances by way of an averaging election or period of grace election.
Averaging Election
If you let more than one property as a FHL, and one or more of these properties does not meet the letting condition of 105 days, you can elect to apply the letting condition to the average rate of occupancy for all the properties you let as FHLs. This is called an averaging election.
Usman lets 4 UK holiday lets in 2016 to 2017 for the following number of days:
Property 1 120 days
Property 2 125 days
Property 3 112 days
Property 4 64 days
Total 412days
If Usman uses averaging, all 4 FHL’S will meet the letting condition (421 days divided by 4 = 105). Without averaging, cottage 4 would not qualify as a FHL or for capital allowances claim.
Note - You can only average across properties in a single FHL business - you can’t mix UK and EEA FHL properties together.
Period of Grace Election
If you genuinely intended to meet the letting condition, but were unable to, you may be able to make a period of grace election that allows the property to qualify as a FHL as long as the pattern of occupation and availability conditions were met.
To make an election, you must be able to show that you had a genuine intention to let the property in the year. For example, where you have marketed a property to the same or a greater level than in prior successful years, or where the lettings are cancelled due to unforeseen circumstances, including extreme adverse weather.
You can make an election where the property met the letting condition in the year before the first year you wish to make a period of grace election. If your property again doesn’t meet the letting condition in the following year, you can make a second period of grace election, as long as you made an election in the previous year.
If your property doesn’t reach the threshold by the fourth year, after 2 consecutive periods of grace elections, it will no longer qualify as a furnished holiday let.
Bonus Alert. If you have more than one property, you can use both averaging and period of grace elections to make sure that a property continues to qualify as a FHL.
So if you have experienced a bad year with your FHL, do not worry. Understanding and utilising the above elections can make it possible to qualify as a FHL and also receive the huge benefits that come from claiming capital allowances.
To find out more about capital allowances and the interaction with a FHL, visit the website and request a free call back (that’s right, no charge for our consultations) and speak with either Matt or Usman directly.