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Longer letting

15 March 2011 / Dean Wootten
Issue: 4296 / Categories: Comment & Analysis , Income Tax
DEAN WOOTTEN explains the effects of the new rules for furnished holiday lettings


  • Qualifying holiday accommodation.
  • Property must be available for 210 days from 2012/13.
  • The 70-day test will increase to 105 days.
  • The two-year period of grace.
  • Averaging may become more relevant.

Furnished holiday lettings have enjoyed a privileged tax status for many years – a status the previous government was planning to remove. Thankfully, the coalition government has decided against such measures, but does intend to change aspects of the tax status furnished holiday lettings currently enjoy.

Before considering the proposed changes it would be useful to consider the rules as they apply to 5 April 2011. Indeed most of these rules are retained post 5 April 2011, but with a few subtle changes.

Rules up to 5 April 2011

The beneficial furnished holiday letting status applies where a taxpayer is involved in the ‘commercial letting of furnished holiday accommodation’. The detailed rules can be found within ITTOIA 2005, s 322 to s 328.

The taxpayer effectively has a furnished holiday letting business which can comprise one or more qualifying properties. That business is then treated for the following purposes as a trade:

  • capital gains tax business reliefs (entrepreneurs’ relief, rollover, gift relief);
  • relief for a trading loss (including the extended three-year carry back in FA 2009);
  • income for pension purposes;
  • landlords energy savings relief.

In addition, a furnished holiday letting business is a qualifying activity for the purposes of capital allowances on plant and machinery. Normal capital allowances are therefore available, including the annual investment allowance and the writing down allowance. The 10% wear and tear allowance cannot be claimed as an alternative.

Commercial letting

Under ITTOIA 2005, s 323 a letting of accommodation is commercial if the accommodation is let on a commercial basis and with a view to the realisation of profit.

Essentially the property must be well managed and have a realistic chance of profit once realistic occupancy levels are achieved. HMRC would expect the business to make a profit within five years from the date of commencement of furnished holiday letting activities (Tax Bulletin 31, October 1997, page 473) although this may be extended in exceptional circumstances.

The Special Commissioners’ decisions in Walls v Livesey (SpC 4) and Brown v Richardson (SpC 129) provide useful guidance.

Qualifying holiday accommodation

For any tax year, qualifying holiday accommodation within ITTOIA 2005, s 325 is accommodation which:

  • is available for commercial letting to the public generally as holiday accommodation for at least 140 days in the 12-month period referred to below; and
  • is so let for at least 70 such days.

Any period of more than 31 consecutive days during which the accommodation is in the same occupation does not count towards the 70 days.

Any such period is known as a ‘period of longer-term occupation’, and if, during the 12-month period, more than 155 days fall during periods of longer-term occupation, the accommodation is not ‘holiday accommodation’.

The words ‘in the same occupation’ refer to tenants and do not prevent relief being due where the owner himself occupies the property outside the holiday season (HMRC Property Income Manual PIM 4110).

The 12-month period is usually the tax year in question.

If a taxpayer buys a property part way through a tax year, he would need to look at the days let in the first 12 months for that particular property. So if let for 75 days in the first 12 months it would qualify as a furnished holiday letting in the tax year of purchase.

On disposals, it is necessary to look at the last 12 months of letting to ascertain whether the property qualified as a furnished holiday letting  in the year of disposal.

Under-used accommodation

In satisfying the 70-day test within s 325, averaging may be applied to the number of let days of any or all of the holiday accommodation let by the same person. An election for averaging must be made no later than the first anniversary of 31 January following the tax year to which it is to apply. See Judyview.



Judy owns three holiday cottages, all of which are available for short-term holiday lets all year round. The actual days let in 2010/11 are as follows:

Seaview cottage: 90
Riverview cottage: 69
Lakeview cottage: 60

Judy has 219 days let between her three properties. The average is therefore 73 days and all three properties would qualify, assuming they are all commercially let with a view to profit.

If Lakeview cottage was let for 48 days rather than 60 days, the Lakeview cottage would not qualify as the three property average is 69 days. Seaview cottage and Riverview cottage would qualify as their two property average is 79.5.


Changes from 6 April 2011

The draft legislation making changes to how furnished holiday lettings are taxed was published in December 2010. The key changes are:

  • With effect from 6 April 2011 loss relief is restricted to the same furnished holiday letting business.
  • With effect from 6 April 2012 the qualifying days that the property must be available for letting is increased from 140 days to 210 days.
  • With effect from 6 April 2012 the qualifying days that the property must actually be let is increased from 70 days to 105 days with a two-year period of grace where this condition is the only one not met.

There does not appear to be any change to the 155 days of longer term occupation when considering the 105 days.

The legislation also codifies the retrospective extension of furnished holiday letting properties to properties within the European Economic Area rather than just those in the UK.

It will generally be harder to qualify as a furnished holiday letting but taxpayers who qualify will receive the same favourable status as before with the exception of treating losses as a trading loss. Losses are still available for relief, but only against future profits from the same furnished holiday letting business.

The removal of the ‘trading loss’ status does not seem to me a major issue. As an owner of a furnished holiday letting, I would hope to make a profit to justify my investment. If not, I can still carry the loss forward, so should get relief at some stage for any losses suffered.

It is a change to the timing of relief rather than the relief itself, after all I must make a profit on a furnished holiday letting within five years to qualify for furnished holiday letting status.

Taxpayers buying a furnished holiday letting post 5 April 2011 are likely to have a loss in the year of purchase via the annual investment allowance. This loss can be offset against other furnished holiday letting profits or carried forward if this is the only furnished holiday let.

As long as clients are briefed beforehand, advisers can manage their clients’ expectations in this regard.

Losses have therefore changed but the change is manageable from a client perspective.

105-day letting test

The most interesting and problematic change will be the increase in days let from 70 days to 105 days. This will be hard for some properties to meet every year, but there is a two-year period of grace if you fail to meet the 105 day let condition – a new s 326A.

Once a property qualifies as holiday accommodation in one tax year, the owner may elect to treat the property as continuing to qualify for up to two later years, even though it does not meet the 105 day letting condition in those years.

The election has to be made in the first tax year in which the letting condition is not met. If it is not made for the first of the tax years it cannot be made for the second. An election for a tax year must be made on or before the first anniversary of the 31 January following the tax year.

The period of grace will only apply if the taxpayer breaches the 105 day test alone. So if the property is not available for the 210 days, there is no period of grace and the taxpayer will lose furnished holiday letting status immediately.

Unfortunately the draft legislation does not appear to allow the period of grace to apply in 2012/13 as this will mean the taxpayer is using 2011/12 as the ‘qualifying year’ for the period of grace.

The new s 326A only applies from 6 April 2012, so the first year it could apply to would be 2013/14 if the taxpayer met the 105 day test in 2012/13. My understanding is that this is the interpretation which HMRC favour. See Mark for an example of how this works.

So clients like Mark will have a little time to consider their options and as advisers we need to explain their options to them as soon as possible as some options will take time to effect.

Clients could try and increase their lets to 105 days in 2012/13 by expanding their marketing base. This will take time to put in place and clients should start working on an expansion plan sooner rather than later.

The client could consider pricing but I would be more inclined to expand the internet-based marketing which will give their property more individual exposure.

On most good rental sites it is possible to pay a little extra to have your details translated to German (say) and then listed in Germany. Expanding the marketing base in this way may secure a few extra weeks which could make all the difference.

Alternatively, clients like Mark could consider disposing of their property before 6 April 2012 so as to secure the 10% rate of entrepreneurs’ relief. This may not be, however, a realistic possibility in the current market.

Or clients can do nothing and accept that the property will not qualify for entrepreneurs’ relief when eventually sold post 5 April 2012.

I believe the draft legislation should be amended to allow clients to treat 2011/12 as their base year for the period of grace. Without this change the new rules will have effect from 6 April 2012 for clients who are unable to increase their lettings above the required 105 days.

If Mark were able to treat 2011/12 as his base year he would then be given a further two years (2012/13 and 2013/14) to increase his letting days to 105 (or sell). This would seem fair to me.



In the years up to 2012/13 Mark owned a property on the Sussex Downs. which qualified as a furnished holiday letting.

The property is available all year round and has been consistently let for 80 to 90 days a year. Mark uses English Country Cottages to market and manage his property and he makes a small profit each year. He inherited the property 15 years ago from his late mother and the property is currently standing at a healthy gain.

From April 2012, Mark’s property will cease to meet the ‘actually let’ condition of 105 days. As currently drafted the two-year period of grace will not apply and furnished holiday letting status will be lost from 6 April 2012.



The rules for averaging remain the same post 5 April 2012 and are likely to be more relevant given that the new 105 day condition. Two examples, George and Mildred, show how averaging will work under the new rules.

Averaging seems to be separately calculated for UK furnished holiday lettings and the EEA (non UK) furnished holiday letting. So a UK holiday let cannot be averaged with a Spanish holiday let.

This appears to apply from 6 April 2011 by way of a new s 326(7). Therefore, prior to 6 April 2011 it may be possible, for example, to average a UK furnished holiday let with a Spanish one so that they both qualify for furnished holiday letting status.



In 2012/13 George has two properties in the UK which are commercially let as furnished holiday accommodation.

Property 1 - let for 114 days
Property 2 - let for 102 days

All other furnished holiday lettings conditions met.

Under averaging these properties both qualify as a furnished holiday letting as the two property average is 108 days.



In the years up to and including 2012/13 Mildred has two properties in the UK which qualify as furnished holiday lettings.

Property 1 - let for 111 days
Property 2 - let for 101 days

All other furnished holiday lettings conditions met.

Up to 2011/12 these properties have previously qualified as a furnished holiday letting as they were let for more than the required 70 days.

For 2012/13 the two properties will continue to qualify as the average is 106 days. It is important that it does meet the letting conditions in 2012/13 in order to get access to the period of grace for later years should lettings fall.

In 2013/14 property 1 is let for 107 days and property 2 is let for 93 days. From April 2013 property 2 ceases to meet the averaging rules as the two property average is 100 days.

Property 2 gets two years’ period of grace and if it still fails to meet the 105 (individually or averaged) within that time then it drops out of furnished holiday letting status from 2015/16.

Property 1 remains a furnished holiday letting providing it exceeds the 105 days.


Capital allowances

New s 13B is inserted into CAA 2001 introducing some changes to capital allowances. These changes, seem to me, to require further HMRC guidance as the legislation is not entirely clear.

Essentially when a property ceases to qualify as a furnished holiday let, we have to value its qualifying assets at market value and then put the disposal proceeds in the capital allowances computation.

This will create a balancing adjustment if the furnished holiday letting business comprises one property but is unlikely to create such an adjustment if there are multiple holiday lets: the proceeds just reduce the pool.

The assets are then an addition for what is now a ‘buy to let’ property, but where these are for use of the tenant, no capital allowances can be claimed in future, instead the 10% wear and tear allowance applies.

This presents problems with identifying and then valuing assets when properties breach the furnished holiday letting conditions but, with a two-year period of grace, this will only be necessary when a property has consistently breached the status rules for two tax years.

Unfortunately, if the period of grace cannot apply in 2012/13, some taxpayers will need to consider the capital allowances adjustments sooner rather than later.

In any event, taxpayers will need to keep some form of fixed asset register to identify the qualifying assets in each property.

Entrepreneurs’ relief

How the period of grace interacts with entrepreneurs’ relief also needs further clarification.

For example, if a taxpayer has a single property and it ceases to qualify on the letting criteria and he elects for the period of grace, would he have to sell it before the second year ended if it did not make the grade? Or maybe he would have to cease activity at the end of the second year of grace so that he would be selling an asset for a business which has ceased.

But what about breaching the available rules and then deciding to sell? This could be crucial, because then the taxpayer would be selling something which has not been used in a trading business, but has still been doing the odd letting during that year, so business has not ceased.

I suspect the taxpayer has then lost the chance to sell with the benefit of entrepreneurs’ relief but further HMRC clarification would be helpful.

And finally

It should be noted that two areas are totally unaffected by the changes as they never relied upon the furnished holiday letting qualifying conditions in the first place.

The first is inheritance tax. Furnished holiday lettings have always had the ability to qualify for 100% business property relief for inheritance tax purposes where significant services are offered to the guests.

The same could be said of furnished holiday lettings outside of the EEA, as the 100% business property relief is not dependent on furnished holiday letting status, but more on the level of services offered by the owner and/or agent.

The other area is VAT. Rental income from furnished holiday lettings in the UK will be standard rated, so clients will need to consider their VAT registration thresholds when owning such property in the UK.

 The standard-rated VAT point is again not dependent on furnished holiday letting status: it is a mandatory standard-rated supply under VATA 1994, Sch 9 Group 1 Item 1(e).

It would also be worth advising clients to consider the VAT rules in any EU country where they have a holiday rental.

Dean Wootten FCA CTA is a freelance author and lecturer and can be contacted via email.

Issue: 4296 / Categories: Comment & Analysis , Income Tax
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