Tax Breaks on Holiday Homes – how not to lose them

Tax breaks on holiday homes are an important perk – but how do you make sure you preserve them during difficult years?

The prospects of getting tax breaks on your holiday homes are looking poor this season, simply because the chances of letting them out have been reduced.

tax breaks on holiday homes - a holiday home by a pool

As a result, your holiday home might cease to qualify as a furnished holiday let and so you would lose the corresponding tax advantages.

What steps can you take prevent this?

If you own a property which you let for short periods it might qualify for special tax treatment.

Instead of the less generous rules for property rental businesses, if conditions are met, you can apply those for furnished holiday lettings (FHLs).

The tax advantages of these are:

  • Capital gains tax (CGT) rollover relief. This can defer the CGT bill if you make a gain from selling the property and reinvest in another
  • CGT entrepreneurs’ relief (ER), now called business asset disposal relief. This reduces the amount of CGT payable on gains from selling the property whether or not you buy another
  • Tax deductions for interest and other finance costs on borrowing used for the FHL; and
  • Capital allowances (a tax deduction equivalent to the cost of depreciation) for furniture, equipment and fixtures used in the property

To qualify as an FHL:

  • The property must be available for letting to the public for at least 210 days in a year (the availability condition)
  • The property must be let to the public as an FHL for at least 105 days in the year (the letting condition); and
  • Lettings of 31 or more consecutive days to the same tenant must not exceed 155 days in total per year (the occupancy condition)

Periods where you occupy the property, or allow others to on a non-commercial basis, e.g. friends and family, must be excluded when working out whether the availability and letting conditions are met.

If someone rents the property for fewer than 31 days but stays longer only because of unforeseen circumstances, e.g. because they or a family member is self-isolating due to coronavirus, you can count it as meeting the FHL conditions.

Not meeting the FHL conditions can cost you extra income tax and CGT. This is increasingly a danger in 2020 as the coronavirus lockdown eats into the holiday season. 

Fortunately, however, the FHL rules allow a “period of grace election”. You can elect  a property which qualifies as an FHL one year to qualify for up to two subsequent years, even if it doesn’t meet the letting conditions, as long as:

  • The property is actually let for some days during the period in question
  • There is a genuine intention to meet the letting condition in those years; and
  • The other qualifying conditions are met

If you have any concerns about your tax affairs, get in touch today and we will advise you.

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