Mark McLaughlin highlights a potential advantage of furnished holiday lettings for capital gains tax purposes.
The landlord of a furnished holiday letting (FHL) that satisfies certain conditions can potentially benefit from ‘special’ tax treatment and certain tax reliefs, which landlords of other properties cannot access.
Does it qualify?
The requirements for a furnished property to be ‘qualifying holiday accommodation’ are beyond the scope of this article, but the three basic conditions are broadly (ITTOIA 2005, s 325):
- Availability: The property must be available for commercial letting as holiday accommodation to the public for at least 210 days during the relevant period.
- Letting: The property must be commercially let as holiday accommodation to the public for at least 105 days during the relevant period (but a period of ‘longer term occupation’ does not count as the letting of it as holiday accommodation). ‘Pattern of occupation’: The total lettings that exceed 31 continuous days (i.e. periods of ‘longer term occupation’) is not more than 155 days during the relevant period.
For capital gains tax (CGT) purposes, if the property satisfies the conditions for the commercial letting of FHLs, the special tax treatment available for individual landlords (compared with the general treatment of rental property) includes certain CGT reliefs, such as gift relief (TCGA 1992, ss 241(3A), 241A(5)).
This special tax treatment of qualifying FHLs may be useful in relation to second homes in certain circumstances.
For example, historically it was popular for a capital gain on a second home to be ‘washed out’ using a discretionary trust. This arrangement broadly involved gifting the property to the trust, with the gain being held over (under TCGA 1992, s 260) on the basis that the gift was an immediately chargeable transfer for inheritance tax purposes.
A beneficiary of the trust (e.g. the adult daughter of the trust’s settlor) would then be allowed to occupy the property as their only or main residence. In due course, the trustees would transfer the property to the occupying beneficiary and claim principal private residence (PPR) relief (under TCGA 1992, s 225). The end result would generally be that the settlor’s second home was received by the settlor’s daughter free of CGT.
This arrangement was curtailed by a targeted anti-avoidance rule (in TCGA 1992, s 226A) from 10 December 2003, which broadly prevents a combination of hold-over relief (under section 260) and PPR relief being used to wash out gains in such a way.
Gifts between individuals
However, if the second home is a qualifying FHL, it is possible to use a combination of gift relief (under TCGA 1992, s 165) and PPR relief to wash out gains for gifts between individuals (e.g. parent and daughter, as in the above example) where the daughter occupies the house as her only or main residence following the transfer.
This is because the anti-avoidance rule in section 226A applies to restrict holdover relief under section 260, but not business asset holdover relief under section 165.
However, it is important to note that the above gift could not be made into trust; where holdover relief under sections 165 and 260 can both apply, the latter relief takes priority (TCGA 1992, s 165(3)(d)).