Normally a residential rental property would be subject to a 28% capital gains tax (CGT) rate on its disposal. However, if it qualifies as a furnished holiday let (FHL) then the capital gains tax rate can be reduced to 10% by taking advantage of Business Asset Disposal Relief (BADR). It may be possible to make a non-FHL into an FHL for the two years prior to disposal and then enjoy BADR on the whole gain.
Recap on FHL rules
To qualify as an FHL, a property must be situated in the UK or the European Economic Area (EEA), it must be furnished and let on a commercial basis and the following conditions need to be satisfied:
1. The property must be available for letting for 210 days a year; and
2. It must actually be let for 105 days a year; and
3. The property must not normally be let for periods of more than 31 consecutive days to the same person, but if it is so let, those days do not count towards the 105 day total (above).
BADR and FHLs
In the case of a single property, relief should be available if the property was used as an FHL for two years before the business ceased and the disposal takes place within three years of any cessation.
BADR may not be available when multiple FHLs are held and only some of them have been disposed. This is because HMRC will not automatically accept that this will be the disposal of the whole or part of a business (they say that it depends on the facts). When not all FHLs are sold then the risk is that HMRC resist a BADR claim on the basis that only business assets are being disposed of rather than a definable part of the business.
This all makes me think that in some cases it may be worth bringing a property within the FHL rules two years prior to a disposal.
Giles owns a rental property in Devon which was purchased years ago for £200,000 and is now worth £1.2m. He now wishes to sell the property and is told that he would face a tax liability of £280,000 (£1m at 28%) if he did so. However, if he were to run an FHL business for at least two years then (all things being equal) this tax liability could be reduced to £100,000 (£1m at 10%).
Forbes Dawson view
Although changing a property to an FHL is a significant commercial decision, there can be significant tax savings achieved in doing so because BADR can be enjoyed on the whole gain even when the FHL status has only applied over a relatively short period of ownership. Also, with the rise of websites such as Airbnb, it is now likely to be quite straightforward to set up a qualifying FHL business.
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