Should you convert a property to a furnished holiday let?
Normally a residential rental property would be subject to a 28% capital gains tax (CGT) rate on its disposal. However, if it qualifies as a furnished holiday let (FHL) then the capital gains tax rate can be reduced to 10% by taking advantage of Business Asset Disposal Relief (BADR). It may be possible to make a non-FHL into an FHL for the two years prior to disposal and then enjoy BADR on the whole gain.
To qualify as an FHL, a property must be situated in the UK or the European Economic Area (EEA), it must be furnished and let on a commercial basis and the following conditions need to be satisfied:
1. The property must be available for letting for 210 days a year; and
2. It must actually be let for 105 days a year; and
3. The property must not normally be let for periods of more than 31 consecutive days to the same person, but if it is so let, those days do not count towards the 105 day total (above).
In the case of a single property, relief should be available if the property was used as an FHL for two years before the business ceased and the disposal takes place within three years of any cessation.
BADR may not be available when multiple FHLs are held and only some of them have been disposed. This is because HMRC will not automatically accept that this will be the disposal of the whole or part of a business (they say that it depends on the facts). When not all FHLs are sold then the risk is that HMRC resist a BADR claim on the basis that only business assets are being disposed of rather than a definable part of the business.
This all makes me think that in some cases it may be worth bringing a property within the FHL rules two years prior to a disposal.
Example: Giles owns a rental property in Devon which was purchased years ago for £200,000 and is now worth £1.2m. He now wishes to sell the property and is told that he would face a tax liability of £280,000 (£1m at 28%) if he did so. However, if he were to run an FHL business for at least two years then (all things being equal) this tax liability could be reduced to £100,000 (£1m at 10%).
Although changing a property to an FHL is a significant commercial decision, there can be significant tax savings achieved in doing so because BADR can be enjoyed on the whole gain even when the FHL status has only applied over a relatively short period of ownership. Also, with the rise of websites such as Airbnb, it is now likely to be quite straightforward to set up a qualifying FHL business.
If you have any questions on the above, please do not hesitate to get in touch.
Need more information?
Should you convert a property to a furnished holiday let?
We offer a wide range of services which are unique to your business. Our team of chartered accountants have a wealth of experience in a broad range of sectors, from construction and property to the charity sector. Our team work hard to ensure they create smart and effective tax-efficient solutions for start-ups to optimise growth and help them succeed. If you want to learn more about how the team can help or simply want some start-up advice from a trusted accountant do hesitate to contact us. For more information please do hesitate to contact us on 0161 962 1855. Alternatively you can email us using the form below and we will contact you as soon as possible.
Our fantastic team at A&C Chartered Accountants are here to help.
Write a Comment