New rules are revealed after holiday home tax shake-up
THE coalition Government confirmed last year that it would not repeal the special tax rules for Furnished Holiday Lettings (FHLs), but would tighten the qualification rules and dilute some of the tax reliefs on offer.
The Treasury has consulted on the issue and is proposing the following key changes:
Increase the minimum period over which a qualifying property is available to let and actually let to the public during a year from 20 weeks and 10 weeks, to 30 weeks and 15 weeks respectively.
Losses made on UK or European Economic Area (EEA) FHLs will be restricted so that they can only be set against profits from the same FHL business, thus ending the favourable loss relief available on FHL activities whereby losses can be offset against other income.
Use notional pools of expenditure for capital allowances purposes, so that when a property does not qualify, no allowances are given, but the tax written down value remains available for future years.
No changes were to be made to the existing Capital Gains Tax (CGT) reliefs. Also, rental profits made from FHLs will continue to be counted as pensionable earnings.
While the Government believed that these changes would incentivise holiday letting owners to increase occupancy and extend the holiday season, many expressed concern that properties in seasonal or remote locations could be adversely affected.
The Government has attempted to address the main areas of concern, primarily those businesses that may struggle to meet the increased availability and occupancy requirements.
Therefore, the proposals have been modified to apply the availability and occupancy rules to all properties owned by a business on an average basis, and not on a property by property basis. This will avoid the complexities where some properties qualify while others do not.
Another key change is to allow businesses which meet the qualifying criteria in one year to elect to be treated as if they met the criteria in the following two years, provided certain criteria are met.
The Government believes these provide a better solution for intermittent FHL qualification than the capital allowances notional pools proposal, so the proposed notional pools idea has been scrapped, meaning businesses that fail to qualify will need to carry out a deemed capital allowances disposal at valuation, with a further valuation needed if it qualifies again later.
The likelihood of this being a frequent issue is now diminished thanks to the new averaging and two year election rules. No doubt many FHL owners will welcome this change, as it will give more certainty as businesses will know at the start of a tax year whether they will qualify that year, which may enable them to make investment decisions or undergo refurbishment projects without concern that this may scupper their FHL status.
The loss relief changes will come into effect from April 2011 whereas the increased availability and occupancy rules come into force from April 2012, allowing property owners more time to advertise and seek extra bookings.
Richard Whitelock is a tax expert at Garbutt & Elliott tel: 0113 273 9600, www.garbuttelliott.co.uk.
CHANGES: Holiday lets face a different tax regime.