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Furnished Holiday lets: Conditions that must apply

6.16

Focus

In order to qualify for FHL status, the following conditions must be satisfied, in relation to each of the properties (or parts thereof) let as FHL accommodation, for the ‘relevant period’ (basically a year, but see 6.21 below) (ITTOIA 2005, s 323; CTA 2009, s 265).

The properties must be:

  • (a) Furnished – the legislation requires merely that the occupant be able to use the furniture, although HMRC says at PIM4105, ‘we would expect sufficient furniture to be provided for normal occupation’; it seems unlikely, however, that an FHL would be inadequately furnished yet be commercially viable.
  • (b) Commercial – the accommodation must be let on a commercial basis, with a view to the realisation of profits.

6.17

Furthermore, accommodation will only qualify if all of the following three conditions are satisfied:

1. Availability condition

The accommodation must be available as an FHL for at least 210 days in the relevant period.

2. Letting condition

The accommodation must actually be let to the public for at least 105 days in the relevant period, ignoring lettings in the same occupation exceeding 31 days unless it is due to illness, accident or similarly unusual/unforeseen circumstances.

The 210-day and 105-day conditions represent a 50% increase on the pre-2012/13 values of 140 and 70 days respectively.

3. Pattern of occupation condition

The accommodation must not be occupied for more than 155 days in the relevant period, for periods in excess of 31 days; however, the test is based on the lessor’s intentions, rather than actual occupation accidentally or occasionally exceeding 31 days, and this would not necessarily preclude extensive personal occupation by the owner ‘out of season’ – see PIM4112.

To help with these conditions in the face of what can often be a fleeting domestic holiday season, there are two saving provisions:

(a) Averaging election

6.18

If there is more than one property (or part thereof) being let as an FHL, then it is possible to test the letting condition against the average occupation rate for all or part of the FHL portfolio. This ‘averaging election’ may therefore save one or more FHLs that would otherwise fail individually. UK and EEA portfolios are two separate portfolios and cannot be mixed for averaging purposes. See also the ‘period of grace’ election at 6.19 below.

The election must be made no later than the second 31 January following the tax year in question (the normal time limit for amending a tax return). It must specify both the already-qualifying holiday accommodation to be included and any or all of the under-occupied furnished accommodation, but the qualifying holiday accommodation cannot be re-used, so as to feature in more than one averaging election per tax year; the approach for companies is similar except accounting periods replace tax years and the time limit for corporate elections is two years following the end of the accounting period (ITTOIA 2005, s 326; CTA 2009, s 268).

Example 6.3 – Averaging election

Charlotte has three holiday cottages, which satisfy the relevant conditions in 2016/17 as to all but actual occupation, with no period being in excess of 31 days, as follows:

Cottage A

130 days

Cottage B

100 days

Cottage C

115 days

Clearly, Cottage B fails the standard 105-day test. But the portfolio average is 115 days – comfortably above the minimum threshold. An averaging election would mean that Cottage B would qualify as an FHL for 2016/17.

(b) Period of grace election

6.19

Where a property has passed the letting condition, either by virtue of actual occupation for 105+ days or by virtue of an averaging election as above, then a ‘period of grace’ election may safeguard that accommodation’s FHL status for up to the next two tax years, provided:

  • the accommodation would satisfy all other relevant conditions than actual occupation; and
  • there was a genuine intention to meet the letting condition during the grace period; and
  • if the grace period extends to two tax years, a valid election has been made for the first tax year of the grace period.

The election deadline is again the second 31 January following the relevant tax year.

The approach for companies is similar except accounting periods replace tax years and the time limit for corporate elections is two years following the end of the accounting period (ITTOIA 2005, s 326A; CTA 2009, s 268A).

6.20

Note that, while an averaging election can make accommodation qualifying so that the next two years may then benefit from a period of grace election, a period of grace election does not make accommodation qualify for the purposes of an averaging election, because only actual qualifying days of occupation are counted in an averaging election.

Focus

Nevertheless, an averaging election does not have to include all non-qualifying accommodation: it is possible, for example, to exclude from an averaging election any accommodation that has been saved under a period of grace election. This allows the averaging election to concentrate on properties that might otherwise fail, due to weaker averages.

Example 6.4 – Period of grace election

Charles has four holiday cottages that would pass all FHL criteria save for the actual letting condition, with actual occupation as follows:

Cottage A

2016/17 140 days

2017/18 120 days

Cottage B

2016/17 110 days

2017/18 115 days

Cottage C

2016/17 100 days

2017/18 61 days

Cottage D

2016/17 90 days

2017/18 100 days

Average

2016/17 110 days

2017/18 99 days

Clearly, an averaging election may be made across the entire portfolio for 2016/17, securing FHL status for Cottages C and D that would otherwise fail. But this would not be sufficient for 2017/18 because of Cottage C’s poor occupation record. However, if (after having averaged in 2016/17) Charles in 2017/18 makes a valid ‘period of grace’ election in respect of Cottage C, and separately an averaging election for Cottages A, B and D, he will secure FHL status for all four cottages – the average occupation for A, B and D being comfortably above 105 days.

Relevant period

6.21

When determining whether or not the above conditions or criteria have been met, the relevant period is usually the tax year for income tax purposes, although where the FHL is let by a partnership whose trade or similar has a different basis year, then the basis year should be followed.

Where the accommodation was not let as furnished accommodation in the previous tax year, then the relevant period is the 12 months beginning with the first day in the tax year on which it is let as furnished accommodation.

Where the accommodation was let out as furnished accommodation in the previous tax year but not in the following tax year, the relevant period is the 12 months ending in the tax year, in which it was let as furnished accommodation (ITTOIA 2005, s 324, see also PIM4105 and PIM1040).

6.22

Companies will generally work to the relevant accounting period (or, if not a 12 month period, the 12 months ending with the last day of the accounting period) but:

  • Where the accommodation was not let in the previous accounting period, then the relevant period is the 12 months beginning with the first day in the accounting period on which it was let as furnished accommodation.
  • Where the accommodation was let as furnished accommodation in the 12 months immediately before the accounting period but not in the 12 months immediately after the accounting period, then the relevant year is the 12 months ending with the last day in the accounting period on which it is let by the company as furnished accommodation (CTA 2009, s 266).

Extract from Bloomsbury Professional Buy-To-Let Property Tax Handbook Provided FREE to all ICPA Members.

By Bloomsbury Professional

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