Watch this space – tax rules on hol­i­day homes set to change

Tax ex­pert Richard White­lock ex­plains the rules on fur­nished hol­i­day lets.

Yorkshire Post - Property - - PROPERTY -

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

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