Furnished holiday lettings have tax benefits that are not available to landlords of residential lets. However, to qualify as a holiday let, certain conditions must be met.
The Three Tests
There are three tests to pass for the let to be treated as a furnished holiday let for tax purposes. These are:
- the pattern of occupation condition;
- the availability condition; and
- the letting condition.
The pattern of occupation condition caps lets that exceed 31 days at 155 days a year.
The availability condition requires the property to be available for letting as furnished holiday accommodation for at least 210 days in the year. Days when the landlord is staying at the property are not counted in this total.
The letting condition requires that the property must be commercially let as furnished holiday accommodation to the public for at least 105 days in the year. Lets of more than 31 days are excluded from this total unless the visit unexpectedly lasted longer than 31 days due to circumstances beyond the visitor’s control, such as flight cancellations or illness.
If the tests are not met in a particular year, where the landlord has more than one furnished holiday let, an averaging election may allow the property to qualify if on average the properties are let commercially as furnished holiday lettings for at least 105 days in the year.
Where the tests have been met previously, a period of grace election may allow the property to qualify for a year where the intention was to meet the letting condition but this did not happen.
Need for Lets to Be Commercial
Only commercial lets are counted when testing to see if the letting condition is met. Days when the landlord stayed at the property do not count, nor do any days where the property was let to family or friends at a reduced or zero rate. These are not commercial lets.
When letting friends or family stay in the property, it is necessary to be mindful of the impact on the letting condition if you are planning on letting them stay for free or at a reduced rate. Timing can be crucial here – in peak season the commercial rate is likely to be much higher than in the off-season. Letting friends stay cheaply in peak season when the property can be easily let at a higher price will not count as a commercial let. However, in the off-season where bookings are sparse, letting to friends cheaply when the property would otherwise be empty could be argued to be a commercial let.
Where possible, sufficient lettings should be agreed with members of the public at a commercial rate to meet the lettings condition before agreeing lets with family and friends.
Deductibility of Expenses
Care should also be taken not to compromise the deductibility of expenses as a result of use by family and friends.
Where the property is kept solely for letting as furnished holiday accommodation, but is in fact closed for part of the year because there are no customers or no business, HMRC allow a deduction for all associated expenses incurred in this period as long as there is no private use. However, a deduction is not permitted where the property is used privately during this period. This would include non-commercial or free use by family and friends.
Avoid the Traps
To avoid the traps, ensure that the property is available for letting to the public for 210 days a year and actually let for 105 days. Use by family and friends at discounted rates can be accommodated around these lets.
Partner Note: ITTOIA 2005, Pt. 3, Ch. 6.