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IS THE HOLIDAY OVER?
Summer holidays now seem a distant memory but, with autumn leaves crunching underfoot, for those of us with residential rental properties in the UK or abroad “Furnished Holiday Lettings” remain a topical tax issue.
Background
Special rules allow the income from furnished holiday lettings (FHLs) to be treated as trading income for tax purposes. One of the main attractions of this has historically been that capital allowances can be claimed on plant included in the property (e.g. boilers, air conditioning systems, furniture etc). These claims, not usually available on residential properties, often create tax losses, which up to the 2010-11 tax year could be offset against general income. As a result many taxpayers benefitted from significant tax refunds.
Recent Changes
Originally the rules only applied to properties located in the UK, however as this was incompatible with European Law, in 2009 the rules were extended to qualifying properties in the European Economic Area (EEA), opening up the tax benefits to far more UK taxpayers.
Changes to the FHL legislation introduced in Finance Act 2011 put the extension of the rules to the EEA into statute. Simultaneously, in an effort to counteract the tax loss suffered as a result, the loss reliefs available were restricted, and from 2012-13 the qualifying criteria will be significantly tightened.
From 2011-12 onwards losses from an FHL can only be offset against profits from the same FHL business, effectively stopping the tax refunds enjoyed by many taxpayers via an offset against other income.
The criteria
The business must be run on a commercial basis with a view to realising profit. This is an area that HMRC are particularly interested in. The rules are not intended to cover situations where an owner may make a small charge to friends and family to cover the costs of a holiday home. There are also requirements regarding availability and actual lettings:
Requirement |
Number of days per tax year |
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Up to 2011-12 |
2012-13 onwards |
Available for letting to the public |
140 |
210 |
Actually let to the public |
70 |
105 |
Further rules restrict the length of time the property can be in continual occupancy.
One good thing to come out of the Finance Act 2011 is the ability from 2010-11 onwards to apply for a “period of grace”. Where a property has qualified as an FHL in a previous tax year and then does not for one or two following years, an election can be made to treat the property as qualifying. This could be most useful in easing the transition to the tougher criteria in 2012-13.
The benefits
Despite the changes there remain definite tax advantages to investing in FHLs compared with other residential property:
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Capital allowances can significantly reduce taxable profits on the rental income;
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The income counts as relevant earnings for pension contributions;
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For capital gains tax (CGT) FHLs qualify as business assets and “rollover relief” can be used to defer the CGT on sale of an FHL if another qualifying asset is purchased, and the CGT on the sale of other business assets may be deferred if an FHL is purchased with the proceeds;
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Holdover relief is also available to defer the gain on a gift of the asset;
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Entrepreneur’s Relief can potentially reduce the CGT on sale from 28% down to 10%.
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