Availability and occupation requirements for furnished holiday letting

In February, the Office for Tax Simplification (OTS) announced a review of the taxation of property income. The scoping document states that this will include “the differences between the rules for residential lettings generally and those applying to Furnished Holiday Lettings”. This was followed by a call for evidence issued on 17 March 2022.

This is timely, as we have just come to the end of the 2020/21 tax return season that reflected the impact of the national lockdowns as a result of COVID-19. The issue here is the impact of the national lockdowns on the qualifying criteria for furnished holiday lets (FHLs) and day count tests for availability and actual letting.

The specific tax rules applying to FHLs have been in place for nearly 40 years. The FHL rules are more favourable in terms of available tax reliefs. Because of perceived unfairness and concern about abuse of the rules, the government tightened up the requirements in 2012. FHLs must be let on a commercial basis and:

• be available for letting for at least 210 days (30 weeks) per year; and
• let to members of the public for at least 105 days (15 weeks) per year.

Other than in exceptional circumstances, there is also a restriction so that a property must not be occupied for more than 31 continuous days by the same person and the total of such lets not exceed 155 days in a year.

The relevant year during which these day count tests are considered is usually the tax year. For a new business, the relevant year is 12 months from the first day the FHL is let by the person as furnished accommodation (see HMRC’s Property Income Manual at PIM2505 for HMRC’s view on the commencement of a letting business).

When the day count limits were increased in 2012, there was a concern that some commercially let FHLs would struggle to meet the required level of letting – especially if they are in a geographically remote location with a shorter letting season. As a result, a concession was introduced that was intended to deal with situations such as the foot and mouth outbreak, economic downturns or the timing of Easter.

This relief, commonly known as a ‘period of grace’ election (strictly, ‘underused holiday accommodation: letting condition not met’), can apply where there is a genuine intention to let the property and the property has been made available for the 210-day period. This means that a property must meet the actual letting requirement in at least one tax year out of every three tax years.

A global pandemic was not in mind when the rules were changed in 2012. So, the question is: how did these rules work as a result of the lockdowns in the 2020/21 tax year?

HMRC’s guidance at PIM4110 was updated to say: “For the tax year 2020/21 the availability condition is satisfied if the person has made the property available for letting as furnished holiday accommodation for at least 210 days in the year even if COVID-19 restrictions prevented the property from being used.”

There was also a helpful exchange at the gov.uk Community Forum under the topic ‘Furnished holiday let – 105 days requirement – coronavirus period’.

So how does this apply to real client situations? Let us consider three sets of owners who are currently letting properties as self-catering holiday accommodation in England: Jean, William and Kate, and Ed.

Jean

Jean started letting an annexe to her home as a FHL on 19 April 2019. The annexe met the FHL qualifying criteria (both availability and actual lettings) for the period 19 April 2019 to 18 April 2020 and so the property qualified as a FHL for 2019/20.

During the first lockdown, Jean’s daughter, Margaret, and her family lived in the annexe, as otherwise they would have been confined to a small flat in London. In June 2020, Margaret and her family had COVID-19 one after the other, so the property was not able to be vacated for visitors. Then Jean had COVID-19 and was hospitalised for a time.

By the time that Margaret and her family had moved out of the property, Jean had recovered her health and the property had been deep cleaned, the summer 2020 season was nearly over. Some letting of the property took place in late August, September and October, but increasing fears of the second wave meant that there was limited occupancy. There were a couple of bookings for the property in December 2020, but the holidaymakers both cancelled.

Ultimately, actual lettings in 2020/21 were 52 days.

In Jean’s situation, her actual lettings were well below the actual letting requirement in 2020/21. As her property qualified in 2019/20, the period of grace election was open to her, provided she met the other requirements, such as the property being available commercially for at least 210 days in the year.

As is often the case in life, the facts are untidy. The annexe is deemed to be available by virtue of the lockdown periods being considered as being available during that time. The occupation by Margaret and her family muddies the water. But given that the property could not be let to third-party customers, it can be considered to still be within the HMRC guidance and amount to being available.

The position gets more difficult once the first lockdown finished. Even if Margaret and her family occupied the property until after 27 July 2020 (more than 31 days), then the exceptional circumstances could be expected to apply given the situation.

So, overall, a period of grace election is a valid approach and the FHL qualified throughout. This is relevant, as there is no break in the period for business asset disposal relief (BADR) or for business asset hold-over relief on a gift.

Full disclosure of the circumstances to HMRC on the tax return is appropriate to avoid any suggestion that there has been a lack of care in the preparation of the return. Careful consideration of the expenses to ensure that no personal expenses are being claimed against taxable income is also required.

William and Kate

William and Kate bought a cottage in a coastal location in October 2019 with the intention of letting the property to make an investment return. The property was purchased in joint names and was part-funded by a mortgage. The property had not previously been let. William is an additional rate taxpayer, whereas Kate is a basic rate taxpayer.

After some minor building alterations and improvements, as well as redecoration and furnishing, it was available to let in January 2020. The property was first let on 7 February 2020 for a week, but subsequent bookings were cancelled due to concerns over COVID-19.

The property was well let during July, August and September 2020. Increasing concerns over COVID-19 restricted use of the property by visitors during October. Then the second lockdown hit. Letting in December 2020 was difficult, but a week’s booking was achieved. Then the third lockdown was introduced.

As a result, in their first year of letting from 7 February 2020 to 6 February 2021, they achieved 102 days of actual letting. This means that the property did not qualify as a FHL in 2019/20, nor did it qualify in 2020/21 (95 days). It is the one week of letting in February 2020 that is the issue.

So, the business starts as a furnished letting, without entitlement to capital allowances, income assessed on a 50:50 basis as no form 17 would have been submitted in any event. Tax relief on the mortgage interest is restricted to basic rate relief only for William in 2019/20 and 2020/21. The qualifying period for BADR does not start until 6 April 2021 (at the earliest) and there is the complication of changing from a furnished letting to a FHL at a later date with the second-hand value of the furnishings being introduced into the capital allowances pool and a further probable loss of tax relief.

All very unfortunate and not particularly fair, but the property cannot meet the conditions for a period of grace election.

Ed

Ed had a buy-to-let property on the south coast. Due to the demand for UK holidays, following the departure of a tenant, Ed redecorated the property during the third lockdown, furnished it and let it as a holiday let from 21 May 2021. His new business got off to a flyer and he has had close to 100% occupancy for the property.

The property easily qualifies as a FHL in 2021/22 as there were more than 105 days of letting.

In Ed’s case, the property could qualify for business rates rather than council tax from the outset of the FHL business. This will change from 1 April 2023 to delay qualification for business rates and, by extension, small business rates relief (SBRR).

Historically, it was the case that the council tax due on FHLs was lower than if the property was assessed to business rates. The incentive was therefore always to avoid an assessment to business rates. However, once SBRR was introduced, this meant that liability to local authority taxation was avoided altogether.

In order to tighten up these rules in England, a property will be assessed for business rates rather than council tax if the owner can provide evidence that on the day of assessment for business rates:

• it will be available for letting commercially, as self-catering accommodation, for short periods totalling at least 140 days in the year after the day in question;
• during the previous year, it was available for letting commercially, as self-catering accommodation, for short periods totalling at least 140 days; and
• during the previous year, it was actually let commercially, as self-catering accommodation, for short periods totalling at least 70 days.

For newly available holiday lets (or those that are purpose built as holiday lets), there is a liability to council tax for each day until the property has been available for 140 days and let out for 70 days. On the day that these two criteria are met, it will qualify for a business rates assessment.

The consultation response published on 14 January 2022 stated: “A property that is first advertised as a holiday let would be liable for council tax for the next 140 days. If it was actually let out for 70 of these days, on day 141, it would qualify for a business rates assessment (provided the owner intended to advertise it for 140 days in the coming 12 months).”

Making it simple

As demonstrated, there are plenty of issues when considering the timing of starting a self-catering accommodation business. In addition, VAT may also be relevant. COVID-19 has made the situation more difficult. For 2020/21, it was more important than ever to carefully examine the dates of letting and the circumstances around the lockdowns. Hopefully the OTS may recommend some simplification and changes to improve fairness and consistency in the application of the rules.

About the author

John Endacott, Head of Tax, PKF Francis Clark