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Furnished Holiday Lets (FHL) HMRC Enquiry Risks

Furnished Holiday Lets (FHL) HMRC Enquiry Risks
The history behind a HMRC enquiry – business rates and Covid-19 Grants
  • FHL can opt to pay business rates as opposed to council tax.
  • In 80% of the UK the business rates are less than the council tax.
  • If the FHL owner has previously paid council tax and the FHL business rates criteria would have applied in the past, a backdated refund could be claimed.
  • Small Business Rates Relief (SBRR) could be claimed which may reduce the business rates to nil or reduce the amount to be paid. The SBRR varies depending upon which part of the UK the property is situated.
  • FHL owners may have been entitled to UK/local Covid-19 grants which are usually linked to the rateable value of the property.
  • Note - the business rates eligibility criteria differs from the FHL income tax/capital gains tax rules.
  • What is basic business rates criteria?
  • It depends upon which part of the UK the property is situated.
  • In England, Scotland and Northern Ireland the property must be available for short term let for at least 140 days per calendar year.
  • In Wales, the property must be available for short term let for at least 140 days per calendar year and actually let for 70 days or more (Scotland will be applying this rule from April 2022).

  • Potential HMRC Attack
  • They will work in conjunction with their partner, the Valuation Office Agency, to review whether the business rates criteria has been met over the past few years.
  • If the criteria has not been met the difference between the business rates paid and the council tax will be recovered along with any Covid-19 grants which should not have been claimed for.
  • Interest and penalties may be charged depending upon the individual circumstances.
  • It is not clear yet how HMRC will apply the review in respect of the 2020 year bearing in mind the restrictions imposed due to the pandemic.
  • This could also provide HMRC with the necessary information to enquire into whether the FHL criteria regarding the income tax and capital gains tax legislation has been breached.

  • The history behind a HMRC enquiry – income tax and capital gains tax (IT/CGT)
  • If you fit the FHL IT/CGT criteria, you can claim tax relief on loan interest at your marginal tax rate. If it was a long term let you would only get tax credit relief at 20%.
  • You can make pension contributions against the rental income, which is not the case with long term lets.
  • You can potentially claim business asset roll over relief on either the acquisition or disposal of a FHL, thereby deferring potential capital gains tax.
  • You can potentially claim gift holdover relief on the gift of the FHL, for example, to a family member, thereby personally avoiding capital gains tax at the time of the gift. This also helps with inheritance tax planning.
  • If structured correctly, you may only pay capital gains tax at 10% on the sale of a FHL business as opposed to possibly 28% if it did not fit the FHL IT/CGT criteria.

  • What is the FHL IT/CGT Criteria?
  • It is normally based upon a tax year.
  • The property must be available to be let at least 210 days per year.
  • If rented out to the same person for more than 31 days, there shouldn’t be more than 155 days of this type of long term occupation per year.
  • Your property must be rented to the public for at least 105 days per year. As long as this has been achieved at least one in every 3 tax years it may be possible to make a period of grace election to still fall within the FHL rules. If you have more than one property then an averaging election may also help in this regard.

  • Potential HMRC Attack
  • If the FHL IT/CGT criteria has not been met then additional taxes, interest and possibly penalties for earlier years could be charged.
  • At present, in respect of the tax year ended 5th April 2021 there is no Covid-19 specific concession to take account of the pandemic. The period of grace and/or averaging elections may help.
  • This could also provide HMRC with the necessary information to enquire into whether the FHL criteria regarding business rates and the Covid-19 grants have been breached.

  • What should you do?
  • It would be wise to carry out a review to ensure that you have met both sets of criteria both historically and going forward.
  • Please contact us if you would like us to carry out this review.
  • If you wish to discuss Furnished Holiday Lettings or other issues please do contact us.
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