Are Furnished Holiday Lets (FHLs) more valuable than ever?
15th February 2019
Posted in Articles, Featured Articles, Private Client, Property Tax by Forbes Dawson
The issue
Many people already know that Furnished Holiday Lets (FHLs) benefit from many tax advantages when compared to long-term rental properties. For example, they famously benefit from Entrepreneurs’ Relief (ER), which means that the capital gain on a sale is taxed at 10% rather than the residential rates of 18% (basic rate) or 28% (higher rates).
However as mortgage interest restrictions continue to rise in an increasingly jittery property market, it may be worth revisiting the FHL tax reliefs and checking if FHL status is viable.
For the current tax year (2018/19), only 50% of mortgage interest will be an allowable expense, with the remaining 50% only available for basic rate relief. The FHL status is therefore more valuable than ever because it is a lesser known fact that FHLs have the additional advantage of not being subject to the mortgage interest restrictions. This means that any mortgage interest costs are fully deductible from rents.
Our view
Bearing the above in mind, it may be worth landlords reviewing their letting arrangements to see if properties can be restructured to short-term lettings in order to meet the annual qualifying conditions (broadly the property must be in the UK/EEA, it must be let for 105 days and available to let for 210 days and most lettings should not exceed 31 continuous days).
For many buy-to-let landlords who have been hit hard by the mortgage interest restrictions, this could be a more attractive option than selling their buy-to-let properties in an uncertain property market.
Ultimately, this is a decision that has to be assessed on balance of each property’s individual facts. A landlord may prefer the security of having long-term tenants over the erratic seasonal nature of holiday lettings. Geography will also play a factor. For example, a two-bedroom flat in Doncaster is less likely to be a realistic FHL proposition than a holiday cottage in rural Cumbria.
