NS ESA - does income from a furnished holiday let count as earnings?

Hi, I’d appreciate some help answering my client’s query:

I am about to purchase a property to run as a Furnished Holiday Let and wanted to check my contribution based ESA payments would not be affected. This venture will be run by a management agency for the benefit of my long term Pension income needs, as due to my health I am and have been unable to work.

Thanks

There aren’t any deductions from the New Style ESA allowance for rental income. However if income is from an official pension scheme read below…..
https://www.citizensadvice.org.uk/benefits/sick-or-disabled-people-and-carers/employment-and-support-allowance/help-with-your-esa-claim/esa-how-much-you-can-get/

Thanks, I’ve advised the client on the pension rules, I just wondered whether income from a furnished holiday let might count as self employed earnings?

Thanks

It’s not a straightforward answer.  Crudely, a property is either going to be viewed as capital or a business asset.  Depending on the benefit being considered, you will want it to be viewed differently.  You won’t normally want it to be capital for means-tested benefits and you probably won’t want it be a business in which you are employed for other benefits.  There’s no straightforward way to decide which it is.

One property was determined to be unlikely to be a business in R(FC) 2/92, formerly CFC/15/1990, where Commissioner Goodman says:

In my judgment however, using Jessel MR’s definition of “business” Smith v. Anderson (1980) 15 Ch D 247 at 258-261 by analogy, it cannot be said that the carrying of a business is constituted by the ownership by an individual of a tenanted house, the collection of the rent, the execution of repairs and the carrying out of other landlord’s duties. For that reason, in my view, the tribunal are correct in law in saying in their reasons for decision, “The house is not a business, it is an investment and as such it’s value falls to be included as a capital asset for family credit purposes.” The tribunal had found the relevant facts and drawn their conclusion, which was a conclusion of law and was correct in my judgment. Consequently I do not accept that the tribunal erred in law and in my view its reasons were sufficient.

That was supported by Commissioner Mesher, to a degree, who considered this in CCS/2128/2001:

“8. ….  Commissioner’s decision R(FC) 2/92, although it is about the question of whether a house that was let constituted a business asset, does give helpful guidance. The mere ownership of property and the receipt of rent and payment of expenses or liabilities would not constitute employment as a self-employed earner. That situation is more properly looked at as the ownership of a capital asset, which produces income. But there will come a point, depending on the circumstances of individual cases, at which the amount of administration and/or activity involved even in the letting out of a single property would amount to the carrying on of self-employment.”

In R(CS)2/06 Commissioner Jacobs concurred:

“49. I respectfully agree with Mr Mesher. It is possible that in this case the rental of the properties and the related powers and duties constituted a business. The tribunal went wrong in law by not dealing with this issue. The tribunal must investigate this issue at the rehearing. The authorities relied on by Mr Goodman show that the issue is one of the proper use of language: is what the non-resident parent does within the normal signification of the word “business”? It is not just a matter of the number of people that are involved, or the number of properties that are owned, or of the number of units that are let. The tribunal must consider all the relevant circumstances of the case.”

The answer is going to be that the decision must be decided upon the relevant circumstances of the case, after detailed consideration.

If it is just the one property as in your original query then it will be rental income. However if he is purchasing more than one, you best read the guidance below.
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1013888/dmgch50.pdf

Furnished holiday lets, provided they meet certain conditions, are treated for tax purposes as businesses generating “earnings” rather than investment income.
https://www.gov.uk/government/publications/furnished-holiday-lettings-hs253-self-assessment-helpsheet/hs253-furnished-holiday-lettings-2020

Although no doubt it could be argued that the benefits and tax systems are allowed to use different definitions of earnings and investment income, I should have thought your client should assume the worst, and only expect his ESA to continue if this activity will be Permitted Work, i.e. will take up less than 16 hours per week of his time and produce earnings (i.e. profits) of no more than £143 per week.

I assume that your client isn’t proposing to use a pension vehicle such as a SIPP to buy the property? If he were, then there would probably not be an issue from a benefits point of view, as the activity wouldn’t be carried on by him and the earnings/income wouldn’t be his.

Thanks everyone, yes I was worried a furnished holiday let might be more likely to be regarded as earnings than simply being a landlord

Hi Bez,
To answer your last question….No, that is not the case. Here is the relevant section from my link.

RENTING OUT PROPERTY AS A BUSINESS
50425 If a person is letting properties that are not the home, the DM needs to consider if this is by way
of a business1
.
1 R(FC) 2/92
50426 A person who
1. has a single property that is not the home and
2. lets the property to tenants and
3. collects rents and does any repairs
is not conducting a business. The property is primarily an investment.

Holiday letting’ is defined in the Housing Act 1988 as ‘A tenancy the purpose of which is to confer on the tenant the right to occupy the dwelling house for a holiday’. – The rental needs to be actually let for at least 105 days of that tax year, for periods of shorter than 31 days at a time.
Hope this helps!

As Gareth says above (I totally agree with him on this), this is not so straightforward. Although the guidance may state that a single property is not a ‘business’, that will not always be the case. See also CH/4612/2014 where Judge Jacobs provides a useful summary of much of the caselaw (and also states the following in his conclusions: “The number of properties involved and the number of units in which they are let are not decisive of the outcome. Their significance can only be stated in terms of likelihood.”).

The fact the property is an FHL is not in itself relevant, although in certain cases it could mean the landlord is required to be more actively involved, which is relevant, as per the case law quoted by Gareth.

Regarding the point made by James above, it is worth noting that FHL’s are still always taxed as ‘property income’. They are simply given some of the tax advantages which are only normally given to “trades”. This is anyway not relevant here for ESA where there is no need for it to be a “trade” - being a “business” is sufficient.
To explain a bit more, income tax is charged on “trading income” and “property income”. Being a “business” is not relevant. Only Class 2 NICs could have some relevance here - see for example the Rashid v Garcia case.

It is interesting to note that for UC, all the above case law has been made irrelevant, as self-employment is now defined in tax terms (i.e. “trade, profession or vocation” and not “business”). The business asset disregards are also provided only to trades - see paras. 7-8 of Schedule 10 to the UC Regs, and Reg 77(3).
The effect of this is that assets of property businesses will never be disregarded for UC.
This is not a widely known point, and in fact the CPAG Handbook gets this wrong in a number of places (in Chapters 7 and 8 in the current version), and includes the following erroneous lines:
“If you are running a property business, rental income counts as self-employed earnings.”
“Rent that you receive from property which is disregarded is ignored, unless the rent counts as self-employed earnings from a property business.”
“Note: letting a single house is not likely to constitute a business.”

The commentary in Sweet and Maxwell on Reg. 77 of the UC Regs also gets this badly wrong (I only have the 19-20 version, so perhaps it has been corrected since).

UB40 - 18 September 2021 12:24 PM

Hi Bez,
To answer your last question….No, that is not the case. Here is the relevant section from my link.

RENTING OUT PROPERTY AS A BUSINESS
50425 If a person is letting properties that are not the home, the DM needs to consider if this is by way
of a business1
.
1 R(FC) 2/92
50426 A person who
1. has a single property that is not the home and
2. lets the property to tenants and
3. collects rents and does any repairs
is not conducting a business. The property is primarily an investment.

Holiday letting’ is defined in the Housing Act 1988 as ‘A tenancy the purpose of which is to confer on the tenant the right to occupy the dwelling house for a holiday’. – The rental needs to be actually let for at least 105 days of that tax year, for periods of shorter than 31 days at a time.
Hope this helps!

Thanks! This looks very promising, does this mean I can guarantee my client’s cb ESA will not be affected?

biscuits - 19 October 2021 04:43 PM

does this mean I can guarantee my client’s cb ESA will not be affected?

No.  read all the posts.

The guidance quoted by UB40 seems to state it should be okay but yeah the caselaw makes it hazier. I guess at most I can say it’s unlikely it will be seen as self employed / employed earnings for the purposes of permitted work, given my client will not be doing anything other than paying a management agency to run the furnished holiday let (which will be a single property).