FURNISHED HOLIDAY LETS
An Update - Know where you stand!
From 6 April 2012 many of the favourable tax rules applicable to
Furnished Holiday Lettings (FHLs) in the UK and EEA were withdrawn by
the UK Government.
We take a look here at the changes in rules and outline some on-going
advantages that FHLs enjoy.
Firstly, how do you qualify as a FHL as of 6 April 2012.
From 6 April 2012, to qualify as an FHL, your property must meet the
following qualifying conditions during a relevant period (usually the tax
year):
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There must be a commercial letting – i.e. a view to realise profits;
Your FHL must be available for letting to the public each year for
210 days or 30 weeks (increased from 140 days or 20 weeks
previously) – this is know as the availability threshold;
Your FHL must actually be let to the public each year for 105 days
or 15 weeks (increased from 70 days or 10 weeks) – this is known as
the occupancy threshold;
Your FHL must be in the EEA (including the UK);
Your FHL must not be let for periods of longer-term occupation (i.e.
to the same person for more than 31 consecutive days) for more
than a total of 155 days during the year;
Where the qualifying conditions are not met during the relevant
period the FHL rules will not apply to the property for that tax year.
For those who have more than one FHL property “averaging” is
permitted.
Benefits of Qualifying as FHL from 6 April 2012
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Income Tax
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Capital Allowances
Generally, capital allowances are not available on residential let property,
but they can be claimed for capital expenditure on “plant and machinery”
used in your FHL. This will include furniture, furnishings, bed linen, etc.
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Capital Gains Tax
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Entrepreneurs’ Relief (ER)
A qualifying FHL will be a trade for ER purposes. Availability of ER will be
subject to the necessary conditions being met. On a qualifying business
disposal you will benefit from the 10% CGT rate (up to the lifetime limit of
£10 million) of Capital Gains.
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Rollover Relief
Property that is a qualifying asset for Rollover Relief. Broadly this means
that any gain on the disposal of an FHL property can be rolled into the
acquisition of another FHL property within three years to defer the Capital
Gain arising.
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Holdover Relief
An FHL property qualifies as a business asset for Holdover Relief. The
importance of this is not only the ability to hold over the gain on a
Potentially Exempt Transfer of an FHL property, but also that a successful
holdover claim made does not preclude the donee from subsequently
claiming Principal Private Residence Relief is he occupies the property
himself.
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Inheritance Tax
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Business Property Relief (BPR)
Provided an FHL satisfies certain conditions, there is some scope for it to
qualify for 100% BPR to mitigate IHT charges.
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Pensions
Income from an FHL is treated as relevant earnings for an individual when
calculating the maximum relief for their pension contributions.
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Planning Points
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Elections to consider
There are two elections you can make to help you reach the occupancy
threshold. If you have more than one property the ‘averaging’ election
might be helpful and if you have a property that reaches the occupancy
threshold in some years but not in others, you could use a ‘period of
grace’ election to help you to reach the threshold.
The new period of grace election allows you to treat a year as a
qualifying FHL year where you genuinely intended to meet the
occupancy threshold but were unable to meet it. In the year before
the first year you want to be treated as a qualifying FHL year the
property must have reached the occupancy threshold, either on its own
or because of an averaging election. If in the following year the
property still doesn’t meet the occupancy threshold then, providing an
election has been made for the earlier year, that year can also be
treated as a qualifying FHL year. This means that you can have two
years running where you failed to let for enough days.
If the property still doesn’t meet the required letting level in the fourth
year (after two years being treated as qualifying) then that property is
no longer a FHL property. The two years in which the property was
treated as qualifying, still do.
We understand that further guidance on some of the more technical
areas of the rules will be published in HMRC’s Property Income Manual
in due course.
Overview
Review your property portfolio. Have you got taxable profits in some
property portfolios yet losses in others ? Maybe you need to
reconsider the need to qualify as an FHL. Losses on FHL businesses can
only be set against the same FHL business .
Whilst the HMRC Manuals state that the claim to qualify as an FHL is a
beneficial claim it does not state it is a compulsory one, therefore
where you have losses on residential property portfolios you may have
profits on your FHL’s or vice versa. In this situation it may be more tax
effective not to make a claim as an FHL and utilise the losses against
residential property surpluses.
Alternatively you may be considering the sale of your FHL whereby
Entrepreneurs relief may be beneficial.
For a free no obligation chat about how we may be able to
assist you with your accounting and taxation requirements
please call Simon Jeffrey on 01829 733333 or e-mail
simon.jeffrey@hlbtarp.co.uk.