Hard on the heels of a series of local lockdowns, England entered into a second national lockdown from 5 November 2020 to 2 December 2020. Separate restrictions applied to Scotland, Wales and Northern Ireland. The restrictions dealt a further blow to the hospitality and leisure industry and landlords letting holiday cottages were once again faced with empty properties.
The FHL rules
Properties that count as furnished holiday lettings (FHL) benefit from more advantageous tax rules than those available to other landlords, offering access to certain capital gains tax reliefs available to traders and entitlement to plant and machinery capital allowances. However, to count as a FHL, a number of tests must be met:
· the property must not be occupied for more than 155 days in the year by lets exceeding 31 days in length;
· the property is available for letting as furnished holiday accommodation for at least 210 days in the year.
· the property is let to members of the public as furnished holiday accommodation for at least 105 days in the tax year.
The property must be furnished and let commercially – days when the landlord stays in the property or on which it is occupied by family or friends rent-free or for a reduced rent are ignored when determining if the conditions are met.
Tests not met
National and local restrictions may mean that the conditions are not met this year. While no special dispensations have been announced to help landlords hit by the effects of the pandemic and associated restrictions, the FHL legislation provided two lifelines.
Lifeline 1 – Averaging election
Making an averaging election can help landlords with more than one holiday let if the tests are not met in relation to each individual property. Where an election is made, the average letting and occupancy rates are used instead, and the tests are treated as met by all properties as long as the average rates are high enough. For example, if a landlord has five holiday cottages which in total were let for l less than 31 days for 550 days in the year, the average occupancy would be 110 days. If an averaging election was made, the condition is treated as met for all properties, even if one property was only occupied as a FHL for, say, 90 days in the year.
An averaging election for 2020/21 must be made by 31 January 2023.
Lifeline 2 – Period of grace election
A period of grace election can be used where the landlord genuinely intended to meet the letting condition but was unable to, for example, because of the imposition of Covid-19 A period of grace election can be made as long as the first two conditions set out above have been met. Also, the property must actually have been let for 105 days as furnished holiday accommodation in the year before the first year in which the landlord wishes to make a period of grace election. If this test is not met again in the following year, a second period of grace election can be made. However, a failure to meet it in year 4 after two period of grace elections will mean that the property will no longer qualify as a FHL. A period of grace election for 2020/21 must be made by 31 January 2023.
Use both lifelines
Landlords with more than one holiday property can use both the averaging and period of grace elections to ensure that, as far as possible, a property continues to qualify as a FHL.