Jon Stow Consulting – Tax Solutions

Following the Coalition’s decision not to abolish the Furnished Holiday Lettings (FHL) tax category with all its advantages over the letting of investment property, we now know what the Government does intend for the future.

Donegal cottage

The regime for FHL is not going to be quite as generous as it was in the past, but we should be thankful that it is not going to be axed altogether. The previous qualifications for a letting to be an FHL were:

• the property should be available for holiday letting on a commercial basis for at least 140 days in the tax year;
• it should be let for at least 70 days;
• individual lets should not exceed 31 days
• the holiday property should not be let to the same person for more than 31 days in the year in the holiday letting period of at least 140 days.
• outside the holiday letting period longer term occupation by one tenant should not exceed 155 days in a tax year.

From 2012-13

• the property should be available for holiday letting on a commercial basis for at least 210 days in the tax year;
• it should be let for at least 105 days;
• individual lets should not exceed 31 days
• the holiday property should not be let to the same person for more than 31 days in the year in the holiday letting period of at least 210 days.
• where the FHL business comprises multiple properties the qualifying days rules will be averaged between the properties so that all will fall within (or without) the FHL category. There will be clarity rather than confusion.
• a “period of grace” will be introduced to allow businesses that do not continue to meet the “actually let” requirement for one or two years to elect to continue to qualify throughout
• that period.

From 2011-12

• losses made in a qualifying UK or European Economic Area (EEA) furnished holiday lettings business may only be set  against income from the same UK or EEA furnished holiday lettings business

The change to the loss relief position is significant. Previously as FHL losses were treated as trading losses they could be set against and individual’s other income of the same year or carried back to be set against the taxpayer’s income of the previous year. If taxpayers will have other income in 2010-11 and anticipate some expenditure in the near future relevant to their FHL businesses they might consider spending the money earlier if it would enable them to claim loss relief against other income in 2010-11.

It is worth repeating the unchanged advantages from my earlier post:

• any capital gains made on FHL-qualifying properties will be liable to capital gains tax at the business rate of 10% and would qualify for the new Entrepreneurial 10% lifetime band which is now to be £5 million, more than enough for most FHL owners one would think.
• a capital gain on one property may be rolled over into another replacement property subject to certain conditions being met. Therefore the gain would only be taxed on the final sale of the replacement assuming that was not also replaced.
• you can claim Capital Allowances in respect of equipment such as white goods purchased for your properties, and can write down the costs against current income. For non FHL furnished rentals normally you are only allowed a deduction of 10% of the rent.

Undoubtedly there will be some property owners who will find that their lettings no longer qualify as Furnished Holiday Lettings and therefore they will ultimately pay more tax. Others whose businesses continue to qualify will not be able to set off their losses and again will pay more tax on other income.

Unless the expenditure on equipment is very high one would expect the ordinary furnished lettings “wear and tear” allowance of 10% of the rent to afford the replacement of lost capital allowances.

The new regime is not quite so friendly as the previous one, but as the last Government was minded to abolish FHL altogether we should be thankful for small mercies and some quite big ones in terms of capital taxes.

It is not possible to cover every detail or quirk of an issue in an article such as this. As always, please take paid-for professional advice before making any changes to your business or personal tax status.