The changes to the tax treatment of furnished holiday lettings from 2010 and what these mean for you
28/04/2009
Currently, if you let properties as a furnished holiday letting ('FHL') you are treated as if you were operating a trade from the property. This has a number of benefits for tax purposes including: loss relief -- you can offset any FHL losses against your other income (eg employment or investment income) in the same tax year or previous tax yearcapital allowances -- you can qualify for capital allowances (at up to 100%) on any assets that you acquire for your propertycapital gains reliefs -- these can significantly reduce the capital gain on a future disposal of the FHL. You can claim business asset roll-over relief, entrepreneurs' relief and relief for gifts of business assets. In many cases Entrepreneurs Relief will be the key benefit as this can reduce your effective rate of CGT to just 10% (from the standard 18% CGT rate) if you own personallythe rental profits from the FHL are classed as relevant earnings for pension purposes. So as you're entitled to get tax relief on pension contributions up to 100% of your relevant earnings, FHL income can be used to support higher pension contributions. This is a pretty impressive list of benefits, and these will substantially reduce the tax charges for most FHL operators. What's changed in the 2009 Budget? There are two main changes in the 2009 Budget: Extension of the FHL scheme for properties in the EEA HMRC have always only allowed properties to qualify for FHL status if they were located in the UK. However they've now changed this rule so that properties located in any EEA country can qualify for FHL status. Note that to qualify the property would need to meet the FHL conditions: Motive: the business must be carried on commercially, and with a view to a profit;Availability: the property must be available for commercial letting as holiday accommodation to the public for at least 140 days during the relevant 12 month period;Letting: the property must be commercially let as holiday accommodation to
members of the public for at least 70 days during the relevant 12 month
period. A letting for a period of longer term occupation is not a letting as
holiday accommodation for the purposes of the letting condition; andPattern of occupation: not more than 155 days must fall during periods of
longer term occupation.A period of longer term occupation is a continuous period of more than 31 days
during which the accommodation is let to the same person. Provided these conditions are met and the property is in a country in the EEA it would qualify for FHL status. The current countries in the EEA are: Austria
Liechtenstein
Belgium
Latvia
Bulgaria
Lithuania
Cyprus
Luxembourg
Czech Republic
Malta
Denmark
Netherlands
Estonia
Norway
Finland
Poland
France
Portugal
Germany
Romania
Greece
Slovakia
Hungary
Slovenia
Iceland
Spain
Ireland
Sweden
Italy
United Kingdom Note that this change to include EEA countries also includes previous periods. So provided you're within the time limit to either: amend your tax return or
file the claimYou can go back and potentially generate a tax repayment. Repeal of the FHL rules The bad news is that HMRC are to repeal the FHL rules from tax year 2010/2011. Therefore the current year is the last year that you'll be able to obtain the generous tax advantages outlined above. How will my FHL income and gains be treated after 6 April 2010? After April 2010 your FHL income will be treated as 'standard' rental income. So if the property is in the UK the rental income will be classed as income from a UK property business. If you have any other UK properties the income will be consolidated with the other property income. You'll also be able to claim the wear & tear allowance if it's let as a furnished property. If the property is located overseas the income will be classed as part of an overseas property business. Your income tax bill will be likely to remain pretty similar, as FHL status really only effected income tax in that you could claim capital allowances.
However if you had limited asset purchases, and didn't use the FHL income to generate pension contributions your income tax bill may be pretty similar. The FHL rules didn't impact on the deductibility of expenses as 'standard' investment properties can still qualify for expense deductions on the same basis. The big difference may be in terms of CGT, given that the CGT rate would be 18% on a disposal rather than the 10% effective rate that FHL owners can currently qualify for.
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