You let several holiday lodges. You are approaching retirement, and are considering selling the properties in the next few years. How could coronavirus cause a nasty tax trap, and how can this be avoided?

FHL status. If your lettings qualify as furnished holiday lettings (FHLs), the properties can enjoy a number of tax benefits not usually available to rental businesses. In the context of this client, the relief that is relevant is the entitlement to claim business asset disposal relief (BADR) on a sale. In order to qualify as an FHL, a property must be available to let by the public for at least 210 days in a tax year, and actually let for at least 105 days. Lettings of more than 31 consecutive days to the same tenant must not exceed 155 days.

Pro advice. If someone rents the property for fewer than 31 days but stays longer only because of unforeseen circumstances, e.g. because they or a family member is self-isolating due to coronavirus, you can count it as meeting the FHL conditions.

Tax trap. We are told that the client is considering selling the property to help fund retirement. The timing of this could cause an unexpected tax trap. Because holiday parks etc. have had to close due to coronavirus, there is a risk that the availability or letting condition won’t be met for 2020/21. This causes an issue because to qualify for BADR, the FHL status must have been met throughout the two years to disposal, or to cessation in the case of an associated disposal. The difference in tax can be up to 18%, which could put a dent in your client’s retirement plans. We will be covering the particular considerations of claiming BADR in respect of FHLs in a future article.

Election. Fortunately, there is a simple election that can alleviate this problem – the so-called “period of grace” election permitted by s.326AIncome Tax (Trading and Other Income) Act2005 .

Pro advice. The election means that if the property qualified as an FHL in a previous tax year, up to two non-qualifying years can be deemed to be qualifying if there was a genuine intention to meet the conditions and the property has been let for some days during the period.

Return. If this applies to your client, make the election on the 2020/21 tax return when you come to file it.

If the strict letting conditions aren’t met this year, your client might lose out on business asset disposal relief, potentially costing them up to 18% in tax. If this happens, use a period of grace election to preserve FHL status.

Article taken from Tax Essentials for Advisors and reproduced with the permission of Indicator – FL Memo Ltd. For more information visit article is published for information only. It provides only an overview and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the above can be accepted by the author or the firm.