Spe­cial tax sta­tus for hol­i­day lets stays, but the rules get tighter

Yorkshire Post - Property - - PROPERTY - Richard White­lock

FOL­LOW­ING a rul­ing from the Euro­pean Union that Bri­tain’s fur­nished hol­i­day let­ting (FHL) rules must ap­ply to prop­er­ties across the Europe Eco­nomic Area (EEA) and not be re­stricted to UK prop­er­ties, the pre­vi­ous Labour govern­ment pro­posed to scrap the FHL treat­ment al­to­gether from April 2010.

They feared that in­vestors would look to buy their hol­i­day homes abroad and yet still ben­e­fit from the gen­er­ous tax re­liefs on of­fer. In­deed, my ar­ti­cle in May last year fo­cused on the pro­posed scrap­ping of FHL treat­ment and what this meant to tax­pay­ers.

How­ever, with a change of Govern­ment came a change of pol­icy with the in­com­ing coali­tion keen to main­tain pref­er­en­tial tax treat­ment for FHLs, backed up with the Chan­cel­lor’s an­nounce­ment in his June Emer­gency Bud­get that he would not re­peal the spe­cial tax rules for FHLs.

How­ever, given the num­ber of Brits who now own hol­i­day homes abroad, ex­tend­ing the cur­rent rules to the whole of the EEA would prove too ex­pen­sive in this time of deficit re­duc­tion. So while spe­cial treat­ment for FHLs may be stay­ing, the Trea­sury is us­ing this as an op­por­tu­nity to tighten the qual­i­fi­ca­tion rules and di­lute some of the tax re­liefs on of­fer.

The Trea­sury has sub­se­quently re­leased a con­sul­ta­tion paper set­ting out the pro­posed changes that are to take ef­fect from April 2011.

The cur­rent rules re­quire a hol­i­day let­ting to be avail­able for let­ting for at least 20 weeks a year and ac­tu­ally let for at least 10 weeks to qual­ify for FHL tax treat­ment. In­cluded in the pro­pos­als is an in­crease to these min­i­mum pe­ri­ods to 30 weeks and 15 weeks re­spec­tively.

Such 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 meant 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.

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 –

Is it fair to ap­ply such a broad brush ap­proach? Com­pare a cot­tage in the Lakes with a coastal let.

com­pare a hol­i­day cot­tage in the Lake District with a hol­i­day let in a coastal re­sort, for ex­am­ple.

The Lake District cer­tainly does have an all-year-round ap­peal and would be un­likely to have any prob­lems in meet­ing these in­creased min­i­mum pe­riod re­quire­ments. But a coastal hol­i­day may strug­gle to meet the min­i­mum re­quire­ment, par­tic­u­larly in the cur­rent eco­nomic cli­mate.

An­other pro­posed change is to re­strict the use of any rental losses made. The cur­rent rules al­low losses made in a tax year to be off­set against any other in­come and the pro­posal is to only al­low losses to be de­ducted from fu­ture prof­its of the same hol­i­day let­ting busi­ness.

It ap­pears from the pro­pos­als that, in cases where the owner of an FHL also has other non-FHL let­ting prop­er­ties, any losses made on the FHL can­not even be set off against prof­its made on the other prop­er­ties – they are com­pletely ring-fenced for the hol­i­day let­ting busi­ness.

The abil­ity to claim loss re­lief against other in­come of the same, or pre­vi­ous, tax year was one of the key ben­e­fits of FHL treat­ment. Tak­ing this re­lief away cer­tainly re­duces the at­trac­tive­ness of own­ing a hol­i­day let and try­ing to meet the qual­i­fy­ing cri­te­ria.

How­ever, it is worth not­ing that the Cap­i­tal Gains Tax (CGT) re­liefs avail­able for FHLs re­main un­touched, in­clud­ing the abil­ity to pay CGT at just 10 per cent, as a fully qual­i­fy­ing FHL can qual­ify for En­trepreneurs’ Re­lief and be­ing able to claim “Rollover re­lief” if sell­ing one FHL and buy­ing an­other. Also, rental prof­its made from FHLs will con­tinue to be counted as pen­sion­able earn­ings.

It is worth re­mem­ber­ing that these pro­posed changes are just that at the moment, and the Trea­sury’s con­sul­ta­tion pe­riod runs to Oc­to­ber 22, af­ter which point the Govern­ment will pub­lish its re­sponse and draft leg­is­la­tion that will take ef­fect from April 2011. 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. It is very much a case of watch this space.

If you own, or are con­sid­er­ing own­ing, prop­erty of any kind, it is rec­om­mended that you seek pro­fes­sional ad­vice.

Richard White­lock is tax con­sul­tant at Gar­butt & El­liott, char­tered ac­coun­tants and tax ad­vis­ers, with of­fices in Leeds (tele­phone 0113 273 9600), York (01904 464100) and New­cas­tle (0191 350 6155).

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