Furnished Holiday Lettings (FHL) have potential tax advantages over other types of lettings, if certain conditions are satisfied. This month's Tax Clinic features a question not only involving FHL's, but also the implications of transferring assets between spouses on the breakdown of a marriage.
 Mark McLaughlin
Furnished holiday lettings (FHLs) have some potential tax advantages attached to them, which come as a pleasant surprise to many taxpayers! For example, HM Revenue & Customs (HMRC) accept that FHLs qualify as business assets for capital gains tax taper relief purposes. In addition, operating FHLs on a commercial basis is treated like a trading activity. This means that tax losses from FHLs are treated as trading losses (which can, for example, be claimed against other income of the same tax year, or carried back if appropriate) as opposed to rental income losses, which are much more restricted in their application. Perhaps not surprisingly, certain conditions must be satisfied for this beneficial tax treatment to apply to FHLs. Query from TaxationWeb visitor ('richinbrill')I have a second property in Cornwall. Purchased in 1997 for £74,000 and now worth £285,000. It was run as a holiday let business between 1997 and 2003. How do I stand for capital gains tax if I sell it?
To further complicate matters, I am getting divorced and my wife is happy to take the second property as a settlement; question, can I just sign over the second property to her and will she be subject to capital gains in the future if she sells? Editor’s CommentsThe query deals with capital gains tax (CGT) issues, and raises another potential advantage of FHLs compared with other investment properties. Gains on the disposal of FHLs are eligible for CGT taper relief at the business asset rate. However, bear in mind that taper relief does not apply to properties held by companies (which is not the case in this query), and also that there are conditions for FHLs to qualify as such (see the recent article 'UK Furnished Holiday Lets and Inheritance Tax Relief' by Julie Butler). As responses to the query indicate, asset transfers between husband and wife are generally treated as 'no gain, no loss' transfers for CGT purposes. However, this beneficial tax treatment only applies to transfers during a tax year in which the spouses are living together. Thereafter, transfers between spouses are treated as taking place at market value, regardless of any consideration paid. Thus there are two potentially complex tax issues here - FHLs and separation/divorce. Specific professional advice is recommended in such circumstances. Forum responses included those reproduced below.'mac600' commented:Having discussed Holiday homes recently with my accountant, he made me aware that on a holiday home that is let for the required number of weeks per year, then after 2 years the property should be exempt from CGT. I'd guess that you would be liale for any gains after 2003. However if you were to sign over the property to your wife then there should be no immediate liability as transfers between spouses are exempt. 'richinbrill' replied:Wife will be very pleased; probably not quite as much as when she is ex wife!! 'Peter D' commented:http://www.hmrc.gov.uk/manuals/pimmanual/PIM4105.htm
Is a must for you. 'maths' said:mac600 is not correct. Furnshed holiday lettings are subject to CGT if sold. However, after 2 years of ownership 75% taper relief applies. As it appears that the property did not qualify for FHL post 2003 then on a sale part of the gain will qualify for taper relief at 75% and part probably 40%. No CGT liability would arise if you gifted the property to your wife but only if at the date of tranfer you were married and still living with your wife (ie not separated); otherwise CGT will arise. On a future sale by her assuming she does not live in it then CGT will arise. 'richinbrill' replied:This is the reply I was hoping for. Assuming I gift the holiday property to my wife (while we are still just about married). How long will she have to live in the propoerty as her main residence before she moves on without paying CGT. This is important to me as the property is next door to my main residence (I don't fancy a real life re run of the 70s sit com "my wife next door") 'maths' commented:There is no simple answer. A main residence is such if it is so qualitatively not a matter of time length of occupation. I also assume the cottage would be her only owned property. Would suggest minimum occupation of say 6 months although it could in theory just as easily be 3 months.It would of course have to be her only house in which she really does reside. I enjoyed the 1970's sitcom but found in real life it's not quite the same!! 'richinbrill' replied:Maths Thanks very much for that. The holiday cottage will be her only residence as I have managed to prize our main house out of her grip. I think she plans to be in the property for 6 months to a year. Thanks for your help. -------------------------------------------------------------------------------- To view this discussion online (including any possible updates), go to:
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