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HMRC internal manual

Property Income Manual

Furnished holiday lettings: qualifying tests for 2011-12 onwards (IT and CT)

ITTOIA/S323-326A, CTA09/S265-268A

This guidance sets out the rules for a furnished let to qualify as a Furnished Holiday Let. These rules apply from tax year 2011-12 onwards. However, please note that the details of the availability condition and the letting condition were slightly different for the tax year 2011-12 but these will be clear when they are set out below.

Summary

To qualify as a FHL a property must:

  • be let on a commercial basis with the view to realisation of profit,

  • be in the UK or in the European Economic Area (EEA) - the EEA includes Iceland, Liechtenstein and Norway; and

  • be furnished - there must be sufficient furniture provided for normal occupation and your visitors must be entitled to use the furniture

  • pass the 3 occupancy conditions

All a customer’s FHLs in the UK are taxed as a single UK FHL business and all FHLs in other EEA states are taxed as a single EEA FHL business. They will need to keep separate records for each FHL business because the losses from one FHL business can’t be used against profits of the other.

Occupancy conditions

Accommodation can only qualify as a FHL if it passes all 3 occupancy conditions:

  • Pattern of occupation condition

  • Availability condition

  • Letting condition

The pattern of occupation condition

The total of all lettings that exceed 31 continuous days must not exceed 155 days during the year.

The availability condition

The property must be available for letting as furnished holiday accommodation letting for at least 210 days in the year (140 days for the tax year 2011 to 2012).

Don’t count any days when the customer is staying in the property, a property is not available for letting if the person operating the property business is staying there.

The letting condition

The property must be let commercially as furnished holiday accommodation to the public for at least 105 days in the year (70 days for the tax year 2011 to 2012).

Don’t count any days when the customer lets the property to friends or relatives at zero or reduced rates as this isn’t a commercial let.

Don’t count longer-term lets of more than 31 days, unless the 31 days is exceeded because something unforeseen happens. For example, if the holidaymaker either:

  • falls ill or has an accident, and can’t leave on time

  • has to extend their holiday due to a delayed flight

If the customer doesn’t let the property for at least 105 days (70 days for tax year 2011 to 2012), they have 2 options to make elections that can help you reach the occupancy threshold:

  • the averaging election - if the customer has more than one property

  • a period of grace election - if the customer’s property reaches the occupancy threshold in some years but not in others

Period to which the occupancy conditions are applied - IT Cases

For a continuing let, apply the tests to the tax year - that’s from 6 April one year to the 5 April the next.

For a new let, apply the tests to the first 12 months from when the letting began.

When the letting stops, apply the tests to the 12 months up to when the letting finished.

Examples

1) A property has been let furnished on a commercial basis since 2012. For 2014-15 the tests are applied to the year of assessment 2014-15  itself.

2) A property is acquired on 1 January 2014 and is let furnished on a commercial basis from 1 March 2014. To determine whether the letting qualifies for 2013-14 the tests are applied to the twelve months from 1 March 2014. For 2014-15 the tests are applied to the year of assessment itself.

3) A property has been let as furnished accommodation on a commercial basis for many years, but letting ceases on 30 September 2015 and the property is sold on 1 December 2015. To see if 2015-16 qualifies, the tests are applied to the twelve months ended on 30 September 2015.

Period to which the occupancy conditions are applied - for CT cases

For a continuing let, the 12 months ending with the last day of the accounting period,

At commencement, 12 months beginning with the date in the accounting period on which it was first let,

On cessation, 12 months ending with the date in the accounting period on which it ceased to be let.

Examples

1) A property has been let furnished on a commercial basis since 2012. For AP ending 31 December 2014 tests are applied for period from 1 January 2014 to 31 December 2014

2) A property is acquired on 1 January 2013 and is let furnished on a commercial basis from 1 March 2013. To determine whether the letting qualifies for the AP ending 31 May 2013 the tests are applied to the twelve months from 1 March 2013 (1 March 2013 to 28 February 2014). For AP ending 31 May 2014 the tests are applied to the 12 months to 31 May 2014.

3) A property has been let as furnished accommodation on a commercial basis for many years, but letting ceases on 30 September 2016 and the property is sold on 1 December 2016. To see if it qualifies in AP ending 31 March 2017, the tests are applied to the twelve months ended on 30 September 2016 (1 October 2015 to 30 September 2016).

Averaging election

If a customer lets more than one property as a FHL, and one or more of these properties doesn’t meet the letting condition of 105 days (70 days for 2011 to 2012 tax year), they can elect to apply the letting condition to the average rate of occupancy for all the properties let as FHLs. This is called an averaging election.

Example

Emma lets 4 UK holiday cottages in 2016 to 2017 for the following number of days:
 

Cottage 1 120 days
   
Cottage 2 125 days
Cottage 3 112 days
Cottage 4 64 days
Total 421 days

If Emma uses averaging, all 4 cottages will meet the letting condition (421 days divided by 4 = 105). Without averaging, cottage 4 would not qualify.

An averaging election can only apply to a single FHL business. UK and EEA FHL business are separate FHL businesses.

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Time limit

An election must be made within 12 months of 31 January following the relevant tax year.

Period of grace election

A customer may genuinely intend to meet the letting condition, but was unable to. If this happens, they may be able to make a period of grace election that allows the property to qualify as a FHL as long as the pattern of occupation and availability conditions were met.

To make an election, the customer must be able to show that they had a genuine intention to let the property in the year. For example, where the property was marketed to the same or a greater level than in successful years, or where the lettings are cancelled due to unforeseen circumstances, including extreme adverse weather.

A customer can make an election where the property met the letting condition in the year before the first year they wish to make a period of grace election (either on its own or because of an averaging election). If the property again doesn’t meet the letting condition in the following year, they can make a second period of grace election (as long as they made an election in the previous year).

If the property doesn’t reach the threshold by the fourth year, after 2 consecutive period of grace elections, it will no longer qualify as a furnished holiday letting.

How to make an election

A customer can either:

  • include the election in their self-assessment property income pages

  • make an election outside a return

Using both averaging and period of grace

If a customer has more than one property they can use both averaging and period of grace elections to make sure that a property continues to qualify as a FHL.

Example

Emma has 4 cottages that she lets as furnished holiday lettings. In some years cottage 3 doesn’t meet the letting condition.

  Year 1 Year 2 Year 3 Year 4 Year 5
           
Cottage 1 qualifies qualifies qualifies qualifies qualifies
Cottage 2 qualifies qualifies qualifies qualifies qualifies
Cottage 3 qualifies averaging period of grace period of grace qualifies
Cottage 4 qualifies qualifies qualifies qualifies qualifies

Emma uses averaging in year 2 and period of grace in year 3 and 4 to make sure that cottage 3 qualifies for the whole period.

Property stops being a FHL

A property will no longer be a FHL if the:

  • property is sold

  • property is used for private occupation

  • letting condition isn’t met even with the averaging and period of grace elections

If a customer’s property doesn’t qualify as a FHL or stops being a qualifying FHL, the special tax treatment will no longer apply. They will need to work out any balancing allowance or balancing charge for capital allowances (see CA23210) and any Capital Gains Tax reliefs will be affected (see CG63950P onwards in respect of entrepreneurs relief; CG60250C onwards for business asset roll over relief; CG66450C onwards for gifts and similar transactions; and CG50200C onwards for securities and shares).