Watch this space – tax rules on holiday homes set to change
Tax expert Richard Whitelock explains the rules on furnished holiday lets.
I MUST start by revealing that the rules are due to be amended after April 5 next year, but at the moment, properties meeting the following criteria qualify as a furnished holiday let (FHL)
The property must be situated in the UK or European Economic Area (EEA)
The business must be carried on commercially with a view to a profit
The total periods of “longer term occupation” must not exceed 155 days per year (“longer period of occupation” is a letting to the same person for more than 31 consecutive days) – this ensures student lettings do not qualify as FHLs.
The property must be available for letting for at least 20 weeks per year
It must be actually let for at least 10 weeks per year. So once a property meets the above criteria and qualifies as an FHL, the preferential tax treatment includes the following:
Loss relief – any FHL losses can be offset against other total income of the tax year or loss and/or the previous tax year (giving an immediate tax saving at the owner’s marginal tax rates). This contrasts with the situation for losses on normal residential or commercial lettings, where losses can only be carried and offset against future property rental profits.
Capital Allowances – CAs (now often at a rate of 100 per cent thanks to the “Annual Investment Allowance”) can be claimed on furniture and furnishing, etc used in the property, whereas these expenses may typically only qualify for a 10 per cent Wear and Tear allowance in non-FHL properties.
Capital Gains Tax reliefs – fully qualifying FHLS can benefit from Entrepreneurs’ Relief, meaning that CGT is payable at 10 per cent and not 18 per cent or 28 per cent. FHLs also qualify for “rollover relief”, meaning that CGT can be deferred if one FHL is sold and another is bought.
Profits qualify as “relevant earnings” for pension contribution purposes.
Historically, special FHL tax treatment has only applied to UK properties, but a recent European Court ruling meant the special tax treatment had to be applied to all properties situated in the EEA and not restricted to the UK.
Given the number of people who own foreign property, the previous Labour government allowed EEA-based properties to benefit from FHL treatment for the tax year 2009/10, but proposed to abolish FHL treatment altogether from April 6, 2010. However, the coalition Government were keen to keep FHL treatment in some form but, recognising the additional cost of simply allowing all EEA properties to join in (and given the deficit reduction drive), they have proposed to tighten the rules from April 2011, while at the same time as keeping FHL treatment alive.
A consultation document was released in late July with a consultation period running to October 22. The proposal is to reform the FHL rules by tightening the qualification criteria and also diluting the tax benefits – with these changes due to come into effect from April 6, 2011. A summary of the Consultation document proposals is below:
The period of time a property must be available for letting is to be increased from 20 weeks to 30 weeks per year (ie, more than six months of the year)
The period of time a property must be actually let for is also to increase from 10 weeks to 15 weeks per year (just short of 3.5 months)
Losses made on FHLs can only be offset against future profits of the same FHL business
Changes will be made to the way Capital Allowances are claimed on properties that do not meet the FHL requirements year after year (but CAs can still be claimed on FHLs).
These changes would clearly target holiday home owners who use their property extensively themselves for family trips and yet still manage to qualify for FHL treatment. Fair enough, some might say, as the current day test rules have often mean that many properties that are primarily enjoyed as family holiday homes can also quite easily qualify for FHL status simply by being made available to members of the public for just a few months each year.
But what about holiday lettings that are genuinely available all year round that may struggle to meet these increased minimum period requirements? The Treasury’s Consultation paper justifies the increases by commenting that the tourism industry has changed significantly since the FHL rules were first introduced in 1984, adding that the lettings window has expanded and more letting is seen over the Christmas and Easter periods.
This is certainly true in many cases, but is it fair to apply such a broad brush approach? Compare a holiday cottage in the Lake District with one in a coastal resort, for example. It is worth remembering that these proposed changes are just that at the moment, and the Treasury’s consultation period runs to October 22. Although it is unlikely that any significant changes to these proposals will be made, there will no doubt be some very strong representations made by the tourism industry and the tax profession during this intervening period. It is very much a case of watch this space.
Richard Whitelock is a tax consultant at Garbutt and Elliott, York, www.garbuttelliott.co.uk