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A standard furnished lettings business is an investment rather than a trading activity, even where a high number of properties are owned and serviced by the landlord. This means that various capital and income reliefs are not available to most landlords, mainly entrepreneurs’ relief and capital allowances.

The Furnished Holiday Lettings (FHL) scheme was introduced in Finance Act 1984 in order to protect the interests of thousands of seaside landladies with small guest-houses, after losses by taxpayers in cases claiming that their furnished lettings business amounted to a trading activity.

Qualifying as a FHL means the rental business is treated as a trade for access to valuable reliefs, including:

  • capital allowances – the cost of capital items such as furniture is deductible from profits
  • capital gains tax reliefs, including rollover relief, entrepreneurs’ relief, gift relief can reduce tax when the business or property is sold
  • personal loans made to the business are tax deductible
  • the business may qualify for Business Property Relief from inheritance tax
  • FHL profits are relevant earnings for pension purposes
  • If the business is jointly run by spouses, profits can be split however they choose. Standard rental businesses must split profits either 50/50 or in line with actual beneficial ownership
  •  No restriction on the deduction of finance costs for a FHL business.

To qualify as a FHL the broad conditions are that the property must be:

  • Furnished
  • Located in the UK or the European Economic Area
  • Let commercially
  • Available to let for a minimum of 210 days per year, actually let for a minimum of 105 days per year, and not generally let for longer periods over 31 days.

One further thing to bear in mind: if turnover is above the VAT threshold of £85,000, the business must register for VAT and charge VAT on bookings.