The cost-of-living crisis has left an indelible mark on the tourism industry, with many people struggling to afford holidays and short breaks. As a result, landlords who own furnished holiday lets (FHLs) may find themselves grappling with a decline in bookings, making it difficult to meet the stringent occupancy tests required for their properties to qualify as FHLs for tax purposes.

However, all is not lost. In this blog post, we will explore the intricacies of FHL occupancy tests and introduce you to the period of grace elections, which could be a lifeline for landlords facing these challenges.

To begin, let's delve into the criteria that define an FHL. Firstly, the property must be in the UK or the European Economic Area (EEA) and adequately furnished to accommodate normal occupancy. Secondly, the property must satisfy three key occupancy tests:

  • The Pattern of Occupation Condition: The total number of lets exceeding 31 days must not surpass 155 days each year.
  • The Availability Condition: The property must be available for letting for a minimum of 210 days in the tax year.
  • The Letting Condition: The property must be let for at least 105 days in the tax year.

The third condition, the letting condition, often proves to be the most challenging for landlords, especially in times of economic uncertainty. However, if you cannot meet this condition, you may be able to utilise a period of grace election to maintain your property's status as an FHL.

A period of grace election is a valuable tool for landlords who genuinely intend to meet the letting condition but cannot do so due to circumstances beyond their control, such as the current cost of living crisis. To be eligible for a period of grace election, you must still meet the pattern of occupation and availability conditions. Additionally, the letting condition must have been satisfied in the year preceding the first year you wish to make the election.

If the letting condition is not met in the following year, you can make a second period of grace election. However, it is crucial to note that if the test is not met in the fourth year after two periods of grace elections, your property will no longer qualify as an FHL. Periods of grace elections can be made either on your Self-assessment tax return or separately, with or without an averaging election.

To illustrate this concept, let's consider an example. If your property met the letting condition in the 2022/23 tax year, you can make a period of grace election for the 2023/24 and 2024/25 tax years if the letting condition is not met, provided that the other two occupancy conditions are satisfied. However, to maintain your property's FHL status, you must meet the letting condition again in the 2025/26 tax year. It is important to remember that a period of grace election for the 2023/24 tax year must be made by 31 January 2026.

For landlords who own multiple FHLs, an averaging election may be more suitable if the letting condition is met in some properties but not others. When an averaging election is made, the test is considered met if, on average, the holiday lets are left for 105 days in the tax year. For instance, a landlord with three holiday lets would need the properties to be let for at least 315 days for an averaging election to satisfy the letting condition across all three properties.

In conclusion, the cost-of-living crisis has presented significant challenges for landlords of furnished holiday lets period of grace elections and averaging elections offer a glimmer of hope. Understanding the occupancy tests and options available allows you to navigate these turbulent times and maintain your properties' FHL status. Remember, careful planning and a thorough understanding of the rules are essential to weathering the storm and emerging stronger on the other side.

As the tourism industry adapts to the new normal, landlords must stay informed and proactive. By utilising the tools at your disposal, such as periods of grace elections and averaging elections, you can protect your investments and ensure the long-term viability of your furnished holiday lets.

While the road ahead may be challenging, with the right strategies and perseverance, you can overcome the obstacles and continue to provide memorable holiday experiences for your guests.