One such advantage is that the owner of the property can claim capital allowances in respect of plant and machinery used in that letting business. Another is that certain capital gains reliefs may be available on the disposal of such properties.
It is therefore important to understand whether or not a property falls to be treated as an FHL, especially insofar as ceasing to qualify could lead to a tax charge based on the value of plant and machinery no longer used in the qualifying activity (i.e. because the activity is no longer qualifying) and because minimum time period requirements relating to capital gains tax reliefs may be reset by a gap in qualifying status.
The main criteria are:
- The property is fully furnished (no surprises there)
- Letting is on a commercial basis and with a view to making a profit
- In the tax year in question the property:
- Is available to be let to the general public for at least 210 days
- It is actually let to the general public for at least 105 days
- There are no more than 155 days of longer term occupation (being occupation by one occupant for a continuous 31 days)
Where a taxpayer has more than one FHL (and it is of note that all UK FHLs are a single FHL business and all EEA FHLs are a single FHL business, each measured for eligibility separately from one another) it is possible to make an averaging election in order to meet the 105 day test.
The Covid problem
So far, so good. And then along comes Covid, and with the various restrictions in place during 2020/21 tax year there were fewer than 210 days on which it would have been legal (or within Government guidelines, at least) to allow visitors to take a holiday in a UK FHL. And of course, in practical terms a huge number of FHL owners will have failed to secure sufficient bookings to have met the 105 day test during 2020/21 tax year.
What does this mean for owners of such properties?
Period of grace election
It is possible for taxpayers to make a period of grace election for up to two consecutive tax years which treats the 105 day test as being met.
To make the election a taxpayer must fail to qualify for FHL status only by reason of failing the 105 day test, meaning all other tests must be met.
Available for letting
Whether a property is ‘available for letting’ has an element of subjectivity to it. The question has been put to HMRC through a public forum, with no clear answer being provided by them.
So whilst there’s no official Government line we can inform you of, we think a pragmatic approach should be taken by taxpayers and HMRC:
Reasonable to make an election
- Genuine effort to maintain the letting activity throughout the year, within the confines of the law and Government guidance in force at various times
- 105 days met through letting to key workers (for commercial rent or on a reduced charge/free of charge basis, but without offending the 155 or 210 day test)
- Periods of forced closure were used to carry out maintenance works
Unreasonable to make an election
- Letting activity is permanently discontinued
- Owner occupies the property, offending the 210 day / 155 day tests
- Property is closed for the whole year, including periods when letting was permitted by law/guidance*
- Property use is switched to assured shorthold (or similar), breaching the 155 day test or making the property unavailable for the necessary 210 days
*there may be exceptions to this, such as where owners were particularly vulnerable to Covid/ were shielding etc.
The next step
We can understand that this issue is not at the top of the Government’s agenda, but it’s likely that it will become more prominent as taxpayers complete their 2020/21 tax returns. If you need help in completing your tax return and making the right disclosure to HMRC please contact Graham Boar or your usual UHY adviser.