Mark McLaughlin highlights a potential capital gains tax advantage of a qualifying furnished holiday lettings business compared with other property rental businesses.
Individual taxpayers who are residential property landlords will be aware that a profit on disposal of a property will normally be subject to capital gains tax (CGT). For disposals in 2016/17, the basic and standard rates of CGT are 10% and 20% respectively (previously 18% and 28%). However, gains on the disposal of interests in residential properties (that do not qualify for private residence relief) are subject to higher CGT rates of 18% and/or 28% instead.
Does it qualify?
However, the commercial letting of furnished holiday accommodation is subject to ‘special’ tax treatment, if certain conditions are satisfied (ITTOIA 2005, s 322). 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 (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 a letting of it as holiday accommodation); and
‘Pattern of occupation’ – The total of all lettings that exceed 31 continuous days (i.e. periods of ‘longer term occupation’) is not more than 155 days during the relevant period.
For CGT purposes, if the property satisfies the conditions for the commercial letting of furnished holiday lettings, the special tax treatment available for individual landlords (compared with the general treatment of rental property) includes certain CGT reliefs, such as business asset rollover relief and gift relief (TCGA 1992, ss 241(3A), 241A(5)).
A further CGT relief available to individual landlords of commercial furnished holiday lettings is entrepreneurs’ relief (ER). A CGT rate of 10% broadly applies to qualifying gains, up to a lifetime limit of £10 million.
Certain conditions must be satisfied to be eligible to claim ER, which are beyond the scope of this article. However, the relief applies (among other things) to the disposal of the whole or part of a business carried on by a sole trader or partnership. The business must be owned for at least one year ending with the date of disposal. The disposal of an asset used (in a sole trader or partnership business) upon cessation is also a material disposal if the one-year ownership requirement is met and the disposal takes place within three years after the business has ceased (TCGA 1992, s 169I).
ER is not generally available on the disposal of a buy-to-let property rental business. For ER purposes, ‘a business’ is defined as anything which is a trade, profession or vocation, and is conducted on a commercial basis and with a view to the realisation of profits (s 169S(1)). A buy-to-let property rental activity is capable of amounting to a business, but will not normally be a trade. There is case law authority (Salisbury House Estates Ltd v Fry  15 TC 266 and Griffiths v Jackson  56 TC 583) to support HMRC’s general view that income derived from rights of property in land is very unlikely to be trading income (except perhaps in a hotel or guesthouse activity, where profits are usually chargeable as trading income).
However, a qualifying furnished holiday lettings business is treated as a trade for certain tax purposes, including ER. This potentially provides individual furnished holiday lettings business owners with the opportunity to sell the business and claim ER, if the relevant conditions are satisfied.
By ensuring that the furnished holiday lettings and ER conditions are both satisfied, the CGT rate on disposal can be reduced from 28% to 10%. If the qualifying furnished holiday lettings business consists of a single property that is sold, the business has clearly ceased as there has been a disposal of the whole business. However, if the furnished holiday lettings business contains several let properties and there is a disposal of only some of the properties, a claim for ER may be challenged by HMRC on the basis that there has been no disposal of part of the business (see HMRC’s Capital Gains manual at CG64015 and following).