To BnB or not to BnB … that is the question

Seeking professional advice is key to maximising income from holiday lets, writes Stuart Petrie of Anderson Anderson & Brown (AAB)

INCOME from furnished holiday lettings (FHLs) in the UK remains subject to tax in the same way as income from other UK land and property though FHLs offer some significant tax advantages over other lettings.

The key distinction is that FHLs are broadly treated as a trading business for tax purposes, while income from residential property letting is treated as investment income for tax purposes.

CONDITIONS
THERE are three occupancy conditions which must be met for a property to qualify as a FHL in addition to the more obvious conditions that the property must be let on a commercial basis and provided with sufficient furniture to allow normal occupation.

1. The availability condition: the property must be available for at least 210 days in the relevant period.

2. The letting condition: the property must then actually be let commercially for at least 105 days in the relevant period.

3. The pattern of occupation condition: the property must not be let to the same person on longer term lets of more than 31 continuous days for more than 155 days in the relevant period. It is important to note that where an FHL has been available to let for 210 days, but not actually let for 105 days, it may be possible to make an election to meet the qualifying conditions.

COVID IMPACT
THOUGH there has been no change to the availability or letting conditions due to the global COVID-19 pandemic, HMRC will consider the availability condition met if the property was available to let for 210 days even if COVID travel or lockdown restrictions meant that the property could not legally be let. The letting and pattern of occupation conditions remain as normal.

PREFERENTIAL TAX TREATMENTS
THE distinction between property income and trading income for FHLs is important due to access to several beneficial tax reliefs, as the reliefs available for FHLs are more aligned with those of trading businesses, not investment.

• Capital allowances: FHL business are entitled to capital allowances on plant and machinery, such as furniture and kitchen equipment.

• Capital Gains Tax (CGT) reliefs: there are a number of CGT advantages. One of the most advantageous tax treatments of FHLs is that Business Asset Disposal Relief may be available once the two-year holding period has been met and provided there is a qualifying business disposal. This means that where a taxpayer operates multiple FHLs, the disposal must be of the entire FHL business or part of the business and not just a disposal of a single asset.

• Pension contributions: income from FHLs qualifies as relevant UK earnings for pension purposes.

• Inheritance Tax relief: as a rule, 100 per cent Business Relief is not usually available for FHLs on the basis that the business is wholly or mainly involved with dealing in land and buildings and making or holding investments. In some exceptional cases, if the taxpayer (or someone acting on their behalf) is providing a level of services exceeding normal landlord responsibilities, it may be possible for the business to only partially be involved in investment activity such that Business Relief may be available. This is a high-level overview of the rules that apply to FHLs. Seeking professional advice is recommended for taxpayers are starting a new FHL business in the UK or in the EEA.

Stuart Petrie is a Business Advisory Services Director at Anderson Anderson & Brown (AAB)