Capital Gains Tax Advantages of Furnished Holiday Lettings (FHLs)

Furnished holiday lettings (FHLs) offer several significant tax advantages over residential lets, particularly in terms of capital gains tax (CGT) reliefs:

Treatment as a Trade

Under CGT legislation, FHLs are treated as a trade rather than as a residential property investment. This classification grants FHL businesses access to certain reliefs available to traders.

Qualifying as an FHL

To benefit from these reliefs, the property must meet specific criteria:

• It must be furnished and let out commercially with the intention of making a profit.
• Occupancy conditions: The property must be available for let for at least 210 days annually, let commercially for at least 105 days annually, and not let for periods exceeding 31 continuous days that total more than 155 days in a tax year.

Roll-over Relief

One of the key advantages is roll-over relief, which allows the gain from selling an FHL property to be rolled over into a new property without immediate CGT liability. The base cost of the replacement FHL property is reduced by the gain, deferring the tax liability until the subsequent disposal of the new property.

Example: If a property is sold for a gain of £75,000 and the proceeds are reinvested in a new FHL property, the gain is not taxed immediately, effectively reducing the base cost of the new property by the amount of the gain.

Business Asset Disposal Relief

FHL landlords may also qualify for business asset disposal relief, which offers a reduced CGT rate of 10% on gains up to £1 million when the property is sold following the cessation of the FHL business. This relief is particularly advantageous compared to the standard CGT rate of 28% for residential property investors.

Gift Hold-over Relief

Hold-over relief is available when gifting an FHL property, allowing the gain to be deferred until the recipient disposes of the property. This can be useful for succession planning, such as transferring the property to children.

These CGT advantages make FHLs a favorable option for property investors looking to maximize tax efficiency and flexibility when managing their property portfolios.

Partner note: TCGA 1992, ss. 152, 165, 169H and 241.