Severn Accounting
Tax & Accounting

Using a period of grace election for furnished holiday lettings

By Ali Jaw ·

If you own a furnished holiday let property in the UK, you may be sitting on a valuable tax planning opportunity. The “period of grace” election is a lesser-known provision that can help property owners defer the point at which their investment falls out of furnished holiday lettings (FHL) status—with significant tax implications. Understanding how this works could save you substantial sums in income tax and National Insurance contributions.

What is a period of grace election?

A furnished holiday let is a furnished property that you let to holidaymakers on a commercial basis. FHL status brings considerable tax advantages compared to standard residential lettings, including the ability to claim capital allowances, to deduct mortgage interest from rental income, and to benefit from trading income treatment for National Insurance purposes.

However, maintaining FHL status requires the property to meet strict conditions. One of the most important is the “letting condition”: your property must be let for at least 70 days in any 12-month period. Additionally, it must be available for letting for at least 140 days during that same period.

The period of grace election is an HMRC-provided mechanism that allows you a breathing space if you temporarily fall short of these requirements. Without it, you’d lose FHL status immediately—and with it, those valuable tax reliefs.

When might you need a period of grace election?

Life happens. Perhaps you underwent renovations that kept your property off the market for several weeks. Maybe holiday bookings were lighter than expected during an economic downturn. Or you decided to take the property off the letting market temporarily whilst you considered your options. In any of these scenarios, you could find yourself at risk of losing FHL status.

Without planning, dropping below the 70-day letting threshold (or the 140-day availability threshold) in a single tax year would disqualify your property. This is where the election steps in.

How does the election work?

If you make a period of grace election, you can treat a year in which you fail to meet the FHL conditions as if the conditions had been met. This is known as a “deemed” year. The election essentially freezes your FHL status and gives you breathing room.

In practical terms, this means:

  • You can treat a shortfall year as if it qualifies, preserving your FHL status and the associated tax reliefs for that year
  • You have up to two consecutive years in which you can claim relief under the period of grace rules
  • After the grace period ends, the property must meet the conditions again—or FHL status is lost

The election must be claimed on your Self Assessment tax return for the year in which the shortfall occurred. You’ll need to tick the appropriate box on your return and potentially include relevant information in the additional information section. HMRC must receive the claim by the Self Assessment filing deadline (typically 31 January following the tax year end, though amended returns can extend this).

The conditions you must satisfy

There’s an important limitation: you can only claim a period of grace election if your property did meet the FHL conditions in either the previous year or the following year. In other words, you must have been a genuine FHL property before the shortfall, and you must return to proper FHL status afterwards. This prevents people from using the relief opportunistically.

Additionally, once you’ve used the election, you cannot use it again for the same property for at least two years. This is a safeguard against repeated claims.

What difference does it make to your tax bill?

The implications are significant. If FHL status is lost, rental income becomes liable to income tax at your marginal rate (20%, 40%, or 45% depending on your income). You’d also lose relief on mortgage interest under current rules, and you’d pay the full rate of National Insurance contributions on profits rather than the reduced small profits threshold. Over multiple years, this could easily amount to thousands of pounds.

For a basic-rate taxpayer with a modest rental profit, retaining FHL status through a period of grace election might be worth £2,000–£5,000 per year in tax and National Insurance savings alone.

Getting it right

Given the specific conditions and tight filing deadlines, it’s essential to claim correctly. HMRC is strict about procedure, and a late or incorrectly completed claim may not be accepted.

For tailored advice, contact Severn Accounting — we’re here to help.