Many farmers and landowners have residential properties which are let out. A residential property let as domestic accommodation will be treated as an investment asset when sold and potentially chargeable to Capital Gains Tax (CGT) at 18% or 28%. The value of any such asset is also potentially chargeable to Inheritance Tax (IHT) on death.
However, if a property qualifies as a Furnished Holiday Let (FHL), valuable tax reliefs can be available, including Business Property Relief on death, meaning that the value of the asset may not suffer IHT.
How does a property qualify as a Furnished Holiday Let?
To qualify the property must be let on a commercial basis with additional services being offered compared to what would be expected from a “normal” let property. HM Revenue & Customs will consider the commercial aspect carefully in deciding whether a property qualifies as a FHL.
Examples of additional services that would be expected to be provided for a FHL include a regular laundry service for towels and bedding, regular cleaning of the property, the provision of meals.
The accommodation must be available to the public for at least 210 days in the tax year, and actually let for at least 105 of those days. The total period of “longer term occupation” must not be more than 155 days during the relevant tax year (a period of longer term occupation is a period of letting to the same person for longer than 31 consecutive days).
If it is only the 105 day letting requirement not met, an election can be made for the property to still be treated as a FHL for a period of up to two years. Therefore this requirement need only be met once every three years.
What are the tax benefits?
The tax benefits have been restricted in recent years but there are still valuable tax reliefs available for a qualifying FHL property.
Any capital gains on the sale of qualifying properties are eligible for Entrepreneurs Relief, therefore may suffer a tax rate of only 10%. FHL properties are eligible for capital gains gift holdover relief, and also rollover relief when replaced, or as a qualifying purchase against which gains on other assets may be set. Capital allowances can be claimed on the cost of furniture and equipment for FHL properties.
Qualifying properties can also be eligible for IHT Business Property Relief on death, meaning that the value of the asset may not suffer IHT. A recent tax case gave a favourable judgement for the tax payer in respect of the availability of Business Property Relief for a FHL property. However, any FHL property should be run as a business to maximise the possibility of obtaining Business Property Relief.
Many farmers and landowners have diversified activities in recent years and may own let properties. The activities undertaken should be considered to ensure that the valuable tax reliefs available to FHL properties can be obtained if possible.
If you would like to discuss tax planning in relation to property ownership, or any other tax planning issues, please contact Nick Dee or Peter Griffiths on 01242 680000.