Guaranteed income from furnished holiday lets

Does a guaranteed income agreement mean that you fail the occupancy conditions?

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Afternoon all,

 

We have a client who purchased a FHL in September 2022. In normal conditions, this would be a FHL, no issues there. However, the site they're situated on offer a "Guaranteed Rental Agreement" which pays our client a fixed monthly income for 2 years, regardless of occupancy, income or expenses.

 

The agreement is for 2-years and they receive 8.5% of the property cost per annum as income, paid on a monthly basis. This is a Red flag to me as the lodge was also purchased from the site. I've seen another atricle on here alluding to the fact that this is more a discount on the purchase price, but unsure how that would be reflected in the accounts.

 

My question is, does this impact the eligibility for the property to be classed as a FHL due to the letting criteria?

 

My initial view was that as it would still be let to holiday makers for 1-2 weeks at a time, this is not an issue. However, after speaking to an advisor at a tax helpline we use, they are pretty adamant that in essence the property is being let to the holiday park for 24-months, they in turn let it to the holiday makers, meaning it isn't eligible due to being continuously let for more than 31 days, for more than 155 days in the year.

 

Having heard their argument, I now agree. But wondered if anyone else in the AWeb community has come across this scenario before?

 

Finally, we have been sent a copy of the guaranteed rental agreement, which helpfully is silent on the issue as to sub-letting etc.

 

It does make reference to the fact that the guaranteed rent is payable in accordance with clause of the agreement for lease entered into by x ltd and the principle (The Purchase Agreement)”, the client is in the process of supplying a copy of this, but I'm not hopeful on it being of much use.

 

Thanks in advance for any insight or experience anyone has to offer up on this.

Replies (8)

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By DKB-Sheffield
08th Aug 2023 15:15

Based solely on the information provided, this does seem more of a fixed rental to the holiday park so, I would, on face-value alone, be in agreement with your advisers. It certainly seems to be more of an investing (property rental/ leasing) activity than a trading (FHL) activity.

The devil is clearly in the detail (agreements, under-leases etc.), and assuming this is common on the park, they should be more than obliging to provide the relevant information.

If the park owners have 'sold' this as being a scheme which works 'within the FHL conditions' they will have the rationale to back this up. It may be correct, it may be dodgy as hell, or it may be that full of caveats (ifs, buts, and maybes) that you have cause to question it. However, at least you have what is required to make an informed appraisal.

There are, of course, a multitude of other considerations which may become clearer from the documentation. Is it residential letting at all? Is the purchase part of a wider scheme? Was the fixed income a requirement of the purchase contract, or optional? Are there any restrictions on sale? Does your client even own a specific FHL? I'm merely guessing at a myriad of scenarios.

In summary, the agreement(s) is/ are required. Without those, or a contributor who also has a client on the specific site in question, it may just be guesswork.

Thanks (2)
Replying to DKB-Sheffield:
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By DKB-Sheffield
08th Aug 2023 15:25

As an additional thought, which may, or may not be helpful or appropriate...

Is this a small (privately-owned) holiday park, or is it a large organisation? If the latter, naming the organisation may be helpful.

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Replying to DKB-Sheffield:
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By Steven Dring
08th Aug 2023 16:44

Thank you for your comments & consideration on this one.

The park is a small family-owned type.

As far as I can ascertain, and certainly in the clients eyes, this is a legitimate FHL investment opportunity. The guaranteed income was optional, which the client took in order to secure a decent regular return, without the headaches & risk of running it themselves.
The client also has the option of moving the lodge to another site should they wish.

There are some restrictions on the sale, in as far as the agreement must run its course, should the lodge be sold mid-way through, it is done so with this agreement in mind.

I plan to look through the purchase agreement / contract when it is provided by the client, before possibly contacting the site for further information if required.

Thanks again.

Thanks (1)
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By The Dullard
09th Aug 2023 00:02

Would this be a free tax helpline?

There is nothing in the legislation that says that the FHL conditions are not satisfied if the property is continuously let for 31 days or more. What it actually says is that a letting of accommodation for a period of 'longer term occupation' does not count towards the 105 day letting requirement and cannot exceed 155 days in total.

It then goes on to define 'longer term occupation' not in terms of who is letting the property, but who is occupying the property. If it is not in the same occupation for more than 31 days, then those days count towards the 105 days and do not get included in the 155 days.

I find it surprising that you and the adviser on the helpline are able to agree with one another when neither one of you has actually read the legislation.

I think that then waving a wet finger in the air and saying that it feels more like an investment than a trade is even worse. It isn't a trade, fullstop. It is an investment activity, fullstop.

But, either the FHL tests set out in the legislation are met or they are not. They are clear, objective and unambiguous, but they need to be read.

Somebody, anybody, please read the legislation. It's so much more constructive than idle conjuncture.

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Replying to The Dullard:
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By Steven Dring
09th Aug 2023 10:49

Thanks for taking the time to reply on this one.
It isn't a free helpline, which is concerning. Also, after going back to them this morning, they're still adamant it would fail the long-term occupation criteria.
This has been a vital lesson for me personally, to spend further time checking the professional advice received.

To add a little meat to the bones and to show I'm not just lazy and overly reliant on others. I had been through (amongst other things) the guidance & help sheet published by HMRC "HS253 Furnished holiday lettings" which erroneously refers to "lets" & "lettings" for the longer-term lets. The legislation however refers to occupation as stated above. Letting & occupation are clearly different, hence my mistake.

Finally, as you & DKB-Sheffield have pointed out, due to the fixed rate of return & lack of active involvement in the asset (amongst other factors), our client appears to have an investment activity, not a trading one (FHL) anyway.

Thanks again for you both taking the time to reply, I hope you managed to get some sleep after posting your reply.

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Replying to The Dullard:
By Ruddles
09th Aug 2023 12:48

The Dullard wrote:
But, either the FHL tests set out in the legislation are met or they are not. They are clear, objective and unambiguous, but they need to be read.

I'm not convinced that they are clear and unambiguous. The way I read the legislation is that the commercial letting of furnished holiday accommodation referred to (eg at CTA 2009 s267) refers to the relationship between the taxpayer and the direct tenant. In other words, the lease mentioned in s265. But it doesn't expressly say so, hence the ambiguity in my eyes.

If I let a second property to A N Other on a normal, commercial, long lease, should the tax treatment in my hands depend on what that tenant then does with the property?

Can FHL treatment apply to both a head-lease and a sub-lease at the same time?

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By tom123
09th Aug 2023 07:23

What about the ruinous depreciation on the lodge... That would be more of a concern to me.

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Replying to tom123:
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By Steven Dring
09th Aug 2023 10:50

Yep, not my choice of investment either, but the client may have other motives for choosing this.

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