QUESTION: In 1989 I acquired a holiday villa in Spain. My family use it for four weeks a year. It is in a community of villas and the management company manage its letting for the other 48 weeks. I have heard there are changes to holiday lets from April 2025 and wonder should I be acting as its value has increased by £500,000 since purchase.
ANSWER: Your property has the characteristics of a Furnished Holiday Let (FHL). FHLs are treated as a trading asset and enjoy favourable tax treatment which comes to an end on April 5 2025.
The first thing to establish is if your property is a FHL? A FHL is a separate category of buildings that stands apart from residential and commercial properties.
To qualify as a FHL the property must be:
- In the UK or in the European Economic Area;
- Furnished - there must be enough furniture provided for normal occupation and visitors must be entitled to use it;
- Meet the occupancy tests (see below).
The property must be commercially let (i.e. you must intend to make a profit) and, if you let the property out of season to cover costs but didn’t make a profit, the letting will still be treated as commercial.
There are three occupancy tests and all three need to be met for a property to qualify as a FHL. For a continuing let, apply the tests to the tax year – 6th April to 5th April the following year. For a new let, apply the tests to the first 12 months from when the letting began and again for the 12 months up to when the letting finished.
To decide if your property is a FHL you need to fulfil the following three conditions:
- If the total of all lettings that exceed 31 continuous days is more than 155 days during the year, this condition isn’t met so your property won’t be a FHL for that year.
- Your property must be available for letting as furnished holiday accommodation letting for at least 210 days in the year.
- You must let the property commercially as furnished holiday accommodation to the public for at least 105 days in the year.
Luckily the management company is managing your property so they will be able to give you a full analysis of lettings to enable you to compare against the above rules.
The advantages of a Furnished Holiday Let include the ability to gift it in your lifetime to say your children and avoid the capital gain arising on the gift via a ‘holdover’ election with the person who is receiving the gift. You have advised that there is a £500,000 capital gain inherent within the property so it may be wise to gift it to your children before April 2025.
Before doing so make sure that you have been returning the rental income each year in the UK and if you have not then you will need to do a voluntary disclosure to HMRC and settle unpaid taxes and interest and penalties.
You also need to consider Inheritance tax because the gift of the property will be a potentially exempt transfer (PET) for IHT, and you will need to survive the gift by 7 years for it to completely fall outside your estate.
- Paddy Harty (p.harty@fpmaab.com) is tax partner at FPM Accountants Ltd (www.fpmaab.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.
