Holiday accommodation: trading or property investment income

Furnished holiday lets (FHLs) will always be an attractive diversification for farmers looking to provide an additional income stream to support their business. However, with the FHL tax regime abolished in April 2025, they are now less attractive propositions for tax purposes.

Until 5 April 2025, FHL businesses qualified for preferential income tax reliefs, such as the ability to claim capital allowances on fixtures, fittings and furnishings within the property and capital gains tax (CGT) reliefs, such as holdover and rollover relief and business asset disposal relief (BADR).

The FHL regime acknowledged that FHLs require significantly more effort than standard long-term lets and were therefore treated more like a trading business than just the passive holding of investment property.

From 6 April 2025, FHLs no longer hold this preferential status and income and gains from FHLs are instead treated as normal property investment businesses. In summary, this means that:

• Income will be reported as part of the property rental business.
• They will no longer qualify for capital allowances within the building – instead, businesses can claim for ‘replacement of domestic items’ relief, but this does not include relief for the initial outlay.
• For property owned jointly by a married couple or by civil partners, strictly the income will be taxed on them 50:50, unless they hold unequal beneficial interests in the property and have made a declaration using Form 17, or they are running it in a partnership business.
• FHL income will no longer count as earnings for pension contribution purposes.
• Finance costs will be subject to tax relief restrictions.
• FHLs will no longer qualify for CGT reliefs, such as holdover relief and rollover relief.
• BADR may be available, but only if the FHL ceased before 5 April 2025.

The transitional rules were, however, more favourable than expected, allowing any unused capital allowances to be automatically transferred to the ongoing property business and any brought forward FHL losses to be offset against all property income going forward.

Unfortunately, while we appreciate FHLs require substantially more effort than a long-term let, HM Revenue & Customs (HMRC) have long considered that the income still only constitutes a return on an investment.

For many years, up to the early 1980s, FHLs were regarded by many as on the borderline of trading income and a property business. This led to numerous disputes. Then two judgments (see the cases of Gittos v Barclay and Griffiths v Jackson and Griffiths v Pearman), put the matter beyond doubt and found, as a general principle, that income from FHLs was not trading income. These cases have since been supported by the cases of Julian Nott, Maclean and Jones where HMRC confirmed that to be trading there must be services provided over and above those normally provided by a property letting landlord.

Whilst the Office of Tax Simplification (OTS) previously proposed introducing a statutory ‘brightline test’ to help differentiate trading businesses from investment businesses, in the event of the FHL rules being abolished, unfortunately, this proposal was rejected by HMRC.

As a result, we are left with having to consider whether a particular FHL business might qualify as trading for tax purposes based on the facts of the individual case. HMRC confirmed that determining whether business activities qualify as a trade will be decided on the facts, with reference to their core principles and legal precedents established through case law.

HMRC confirm in their manuals…

‘income from furnished lettings is rarely trading income, even when the landlord works full time running the rental business.

It is only treated as a trade when the landlord remains in occupation of the property and provides services substantially beyond those normally provided by a landlord. This will be the case, for example, where the activity consists of providing bed and breakfast, or running a hotel or guesthouse.’

To determine whether an activity is a trade, the courts have also found the so called ‘badges of trade’ helpful indicators of trading. These include:

• Profit-seeking motive – is the primary goal to generate profits to support a trade?
• Number of transactions – are there repeated transactions to support a trade?
• Nature of the asset – is the asset (in this case property) a type that can only be turned to advantage by sale or can it yield an income – the latter supporting the argument for investment.
• Existence of similar trading transactions or interests –does the individual or business engage in similar activities elsewhere and are those activities trade or investment? For example, a builder who has built and sold houses alongside his building contracting trade is arguably chargeable to income tax as trading on both activities.
• Changes to the asset – if an asset is sold, you would expect the asset to have been modified or repaired before selling at a profit for the activity to be a trade? In a FHL business there is no asset bought and sold.
• The way the sale was carried out – was the transaction carried out in the manner typical of a trading business? And are assets bought and sold turned around quickly.
• The method of finance – Where assets are bought and sold, if finance to purchase is long term this would indicate the asset is bought for investment.
• Method of acquisition – is the business operated in a way typical of a trading business?

Clearly, given the asset itself is a property, and the property is what creates the income, the badges of trade do not help the argument for a FHL to be trading. Instead, we must look at the services provided.

If, for example, a FHL owner provides substantial additional services, such as providing food, guided walks, tractor rides, events, such as live music, BBQs, pizza evenings, then HMRC may assess that the business meets the trade criteria.

Ultimately, the FHL would need to be run more akin to a bed & breakfast or hotel, to qualify for this preferential trading treatment. To support this any additional services would need to be separately identified and charged, to be able to support a trading position.

So, although the FHL regime has been abolished, if the property business, because of the substantial services provided, is considered ‘trading’ for tax purposes, a more favourable tax treatment may be accessed.

Where there is a trading business, the normal trading rules will apply. This enables businesses to not only tap into the more favourable income tax and CGT reliefs, as previously under the FHL regime, but also gain from a more favourable trading treatment. For example, under the FHL regime, FHL losses were only able to be offset against the FHL business. Going forward under normal property loss rules, FHL losses can only be offset against other property income.

However, if the FHL business is deemed trading, trading losses can instead be offset against total income in the same or previous year. In addition, there are favourable loss relief claims available in the early years of a trading business.

Given the lack of clarity, and no guidance from HMRC, without a brightline test it is likely we will see more cases on this subject, which may provide more clarity between the trading and investment status of FHL. In the meantime, FHL owners will need to consider whether they wish to benefit from trading status for tax purposes and whether to do this they can provide the services required to their guests during their stay.

Where property is leased and subsequently let to holiday makers on a short-term basis, the TOMS VAT scheme, which means you only charge VAT on your profit margin, can save a considerable amount of VAT. However, businesses who lease properties on long-term arrangements but resell on a shortterm basis would be well advised to consider their position, as highlighted in the recent Tax Tribunal involving Sonders, a company letting properties to holiday makers.

If this is of interest then please read the full article here

https://albertgoodman.co.uk/insights/vat-holiday-lettings-and-the-tour-operators-margin-scheme