Lee Sharpe looks at the past, present and potential future tax regime for Furnished Holiday Lettings.
On 9 December, the government published its ‘response’ to its Technical Consultation earlier in the year, regarding developments in the “Furnished Holiday Lettings” (“FHLs”) tax regime. It is useful, because it also set out how it currently intends for the regime to develop over the next year or so. This article sets out the key issues, and how they will be implemented.
Brief and Recent History of the FHL Regime
The tax treatment of FHLs has undergone some significant changes in the last year or so – brought about by the previous government’s recognition that the favourable tax regime for FHLs, in being restricted only to UK properties, was contrary to EC legislation.
In the 2009 Budget, the previous government extended the scope of the FHL regime to properties in other countries in the European Economic Area, (EEA), but on a temporary basis only, and with a view to abolishing the regime outright, because of fears of the possible risk to the Exchequer. (Perhaps because immediate cancellation of the regime could have landed the UK government in hot water with the European Court, in the same way as it did with the summary introduction of the 3-year cap for VAT, and it was necessary to recognise the application to EEA properties in the interval leading up to abolition). Draft legislation was published in the 2009 Pre-Budget Report.
That legislation got as far as the 2010 Budget, but in the end was omitted from the Finance Act itself, a ‘victim’ of the push to get the Finance Act on the statute books in advance of the General Election – the then Opposition made it clear that they were unhappy with the proposed changes.
In the June ‘Emergency’ Budget, the new government set out that it proposed to retain the FHL regime, but acknowledged that some changes might be necessary. A consultation document was published in July, and we have now received the results of that consultation.
Benefits of FHL Treatment
FHLs, as defined, are broadly a ‘halfway house’ between a rental business – which constitutes investment income for tax purposes – and a fully-fledged hotel, which is of course a trading activity.
FHLs therefore enjoy a special status, effectively on a trading footing, as follows:
- Currently, losses may be set ‘sideways’ against other income in a tax year – this is a distinct advantage over normal (unincorporated) investment property businesses, in which losses are generally pooled and may only be set against future property income.
- Unusually for residential property lettings, Capital Allowances could also be claimed on eligible expenditure within a residential part of the property, which often proved useful.
- Income ‘counts’ as relevant earnings for pension purposes
- FHLs are treated as eligible assets for Capital Gains Tax reliefs, such as Gift Relief, Rollover Relief and, particularly usefully, Entrepreneurs’ Relief.
- FHLs may also be eligible for favourable Inheritance Tax treatment, (“Business Property Relief”), although this is not guaranteed.
The Old Rules
Availability Condition – The property must be available for commercial letting as holiday accommodation, for at least 140 days in the year. ‘As holiday accommodation’ means must be let for no more than 31 days to the same party, on a continuous basis.
Letting Condition – The property must actually be let as holiday accommodation, for at least 70 days in the year.
There must not be more than 155 days in a year, in which the property is let for periods of more than 31 days continuously to the same party.
What is Changing?
From April 2011, the special status in terms of Income Tax loss relief rules is still being abolished so that losses cannot be set against other income.
There will be a UK FHL business, (of however many individual properties), and a separate EEA FHL business, for all qualifying properties outside the UK. Much like with normal investment property businesses, profits and losses in each business will be pooled, and any net losses may be carried forwards but only in that business. It is important to bear in mind that there can be any number of FHL properties in the UK (or separate EEA) business: profits and losses from individual properties in a business are aggregated.
From April 2012, the property must be available to let as holiday accommodation on a commercial basis, for at least 210 days.
From April 2012, the property must actually be commercially let as holiday accommodation, for at least 105 days.
These increased thresholds are being introduced one year later than originally planned by the new government. This is apparently due to feedback in the consultation period, where many stakeholders advised that bookings might often be made up to 18 months in advance, and so more time would be needed to adapt marketing strategies, etc., to deal with the higher thresholds.
Note that, although the thresholds are now significantly higher than they were originally – particularly in the context of the relatively short holiday seasons (season?) typical of UK properties – it should now be possible for properties in a business to qualify in one year against the new thresholds, and elect to retain FHL status (for the business in aggregate) for each of the next two years afterwards. There will be conditions, which are yet to be announced.
This ‘relaxation’ of the rules is also very helpful as regards Capital Allowances: there were real concerns that the higher thresholds would make Capital Allowances unworkable if businesses kept moving in and out of FHL status; it is hoped that this additional flexibility will make it practical to continue to claim Capital Allowances – although in the original consultation, it was advised that the ‘concessionary’ treatment of suspending Capital Allowances in a year when a business didn’t qualify, would have to be abolished – i.e., if the FHL criteria are failed (perhaps, say, in Year 4, assuming it qualified in Year 1 and the aforementioned elections were made for Years 2 and 3) then there will be a ‘balancing event’ for Capital Allowances purposes; valuations might also then be required for eligible assets if FHL status were subsequently re-acquired.
One final point is that results can be averaged out over all properties in that FHL business, allowing struggling properties to remain in the pool if balanced by more successful properties.
One of the most important benefits in the old regime was being able to set FHL losses against other general income. This is still possible for 2009/10 and 2010/11, so there is still scope to make best use of any current losses. Landlords may therefore want to ensure that repairs and other allowable expenses are claimed to their fullest extent; if finances permit, it may be appropriate to bring forwards expenditure, such as maintenance, decorating and the like; also if any planned capital expenditure is eligible for Capital Allowances, then it may be advantageous to incur the expenditure before April 2011. This approach should help to maximise any losses that might still be available to set against other income.
Beyond that, there is still some real benefit to FHL status, in terms of the Capital Gains reliefs, and potential for Business Property Relief for Inheritance Tax Purposes.