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