With the COVID pandemic all but obliterating international travel over the past couple of years, no one could have failed to have noticed the rise in staycations – UK holidaymakers choosing to spend their annual two week break in their home country.
With many people discovering for the first time what amazing scenery and places to visit we have in the UK, the trend in staycations looks set to continue into the years ahead.
Many farmers have already benefited from this, particularly in relation to the relaxation of Permitted Development Rights (PDRs) enabling them to run pop up campsites and similar visitor attractions for 56 days per year rather than the normal 28 days.
But with that rule now having reverted back to 28 days, many farmers will be looking for more permanent ways to cash in on the staycation boom.
One tax efficient way of doing this is converting unwanted barns into Furnished Holiday Lets (FHL).
FHL and tax relief
One of the major benefits of owning a FHL is that under certain circumstances, it can qualify for Business Property Relief (BPR), a relief from Inheritance Tax (IHT).
Normally, such relief does not apply to an investment property as most holiday properties are. However, under certain circumstances, it does to FHLs.
According to HMRC’s own manual, it all hinges on ‘additional services’.
The manual says:
“furnished holiday lets will in general not qualify for business property relief. The income derived from such businesses will largely consist of rent in return for the occupation of the property. There may, however, be cases where the level of additional services provided is so high that the activity can be considered as a non-investment, and each case needs to be treated on its own facts.”
This, of course, begs the question, what constitutes an additional service?
Well, there isn’t a clear-cut definition, but in a testcase called the Personal Representatives of Graham vs HMRC, a tribunal found that the FHLs owned by Mrs Graham did qualify for BPR due to the extra amount of work the owners carried out on the property.
The additional services provided by Mrs Graham included:
- The guests could enjoy and use the gardens
- There was a solar-heated outdoor pool
- There were other facilities such as a sauna, barbeque area, games room and laundry facilities
- Fresh flowers were supplied as were toiletries and cleaning materials
- It was possible to hire golf buggies and bikes
- The owner provided help with arranging events such as weddings and other parties
- The communal facilities, including the pool, were cleaned weekly.
The tribunal decided that the extra activity carried out by Mrs Graham amounted to more than just passive investment income, and the property qualified for BPR.
Of course, this could be a risky strategy as there is no precise definition of how many additional services are needed to take the property beyond the threshold, but the results of this case give a good indication. The important point is the FHL must be run as a business with the owners involved in the day to day running of it, so it becomes more than a passive investment income.
Regardless of whether your FHL qualifies for BPR or not, it will certainly qualify for capital allowances. Capital Allowances are a form of tax relief that can be claimed on items such as furniture and white goods by deducting the cost of them from the pre-tax profit.
What qualifies as an FHL?
To be classed as an FHL, there are certain conditions that the property must fulfil. These include being:
- Let out for a minimum of 105 days per year
- Available for let for a minimum of 210 days per year
- Furnished to a standard that allows everyday occupancy
- Used by tourists and holidaymakers, not family and friends
- Located in the UK or another country within the European Economic Area (EEA)
- A short-term rental not rented out for longer than 31 days to any one individual or family.
Given the potential tax incentives around FHLs, converting that old disused barn could well make for a good investment. And even if the most lucrative tax relief isn’t available – BRP – with staycations set to become even more popular, the rental income generated by a tastefully converted FHL in a beautiful rural setting would go a long way to making any farm more financially stable in the post-BPS world that we’re about to enter.
To find out more about FHL, tax planning, succession planning or business planning for farm diversification projects, get in touch on (01295) 270200 or fill in the contact form here.