In order to qualify as a furnished holiday letting (FHL) the accommodation must be in the UK or European Economic Area (EEA) and commercially let. You must also satisfy the following tests in order for your property to qualify as an FHL.
1. The property must be available for commercial letting as holiday accommodation to the public for at least 210 days.
2. The property must be commercially let as holiday accommodation to the public for at least 105 days.
3. The property must not be let for periods of longer-term occupation for more than 155 days during the year.
The FHL Rules
Different tax rules apply to income from letting property and income from trading. Income from letting property, including holiday lettings, is normally taxed under the property income rules, and treated as investment income. However, the FHL rules allow holiday lettings that meet certain conditions to be treated as a trade for the following tax purposes:
- Loss relief
- Capital allowances
- Landlords Energy Saving Allowance (LESA)
- Certain capital gains tax reliefs (including business asset roll-over relief, entrepreneurs’ relief, relief for gifts of business assets, relief for loans to traders and exemptions for disposals of shares by companies with a substantial shareholding)
- Relevant UK earnings when calculating the maximum relief due for an individual’s pension contributions.
The main benefit is that any losses on an FHL can be claimed against other income, while normal property losses can only be carried forward and set against future property income. Wear and tear allowances are not available for FHLs as they qualify for capital allowances instead. There are certain transitional rules in place for FHLs in the EEA.