Many farmers are diversifying into other income streams, including property letting. Property rental businesses are generally treated as an investment activity rather than carrying on a trade, however any property business that qualifies as a ‘furnished holiday letting’ (FHL) will enjoy certain tax advantages normally only available to trading businesses, including:
- Capital Gains Tax reliefs for traders (Business Asset Rollover Relief, Entrepreneurs’ Relief and relief for gifts of business assets – Hold-Over Relief)
- Plant and machinery capital allowances for items such as furniture, equipment and fixtures
- Profits count as earnings for pension purposes
To benefit from the above reliefs, the profit or loss from FHLs must be reported separately from any other rental business.
In order to be treated as a FHL business there are certain conditions that need to be fulfilled:
- Stating the obvious, the property must be furnished – there must be sufficient furniture provided for normal occupation.
- The letting must be on a commercial basis with a view to realising a profit.
- The property must be available for let for a minimum period of 210 days in a year and actually let for a minimum of 105 days in a year, not including longer-term lets to the same person for more than 31 consecutive days.
- The maximum period in which the property can be let on longer-term lets cannot exceed 155 days.
Holiday accommodation is standard rated for VAT purposes. The owner(s) of a FHL or a group of FHLs will be liable for VAT once turnover exceeds the VAT registration threshold. FHL businesses which exceed the current VAT registration threshold must register for VAT or VAT should be charged on the rents if the property owners are already VAT registered. The VAT registration threshold is not applied to each business separately but to all businesses carried on by a trader (or group of traders in partnership) collectively. Take care therefore if the farm partners and FHL owners are the same, as this would subject FHL rents to output VAT at the standard rate.
Losses incurred by a FHL business may only be set against future income from the same FHL business.
The tax rules for FHLs are not straightforward and the above is intended to provide an overview of some of the key points only. If you would like to discuss this further, please get in touch.