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Taxation of Furnished Holiday Lettings

Rather than bore you with another “Emergency” Budget Summary, and many of us including me have been inundated with very similar emails and documents containing the “key” facts, I am going to be picking out and expanding on a few items of interest. I think Furnished Holiday Lettings are a good place to start because they are an area of entrepreneurial potential and should be of interest to many.

In the 2009 Budget Chancellor Darling announced that the special arrangements distinguishing Furnished Holiday Lettings (FHL) from other types of letting would be abolished from April 2010. Briefly, profits from lettings of residential and commercial property have been generally treated as investment income. FHL income has in recent years been treated as business income. The reason Mr. Darling proposed doing away with the special advantages of FHL was that the European Union considered the rules to be discriminatory in that they only applied to lettings within the UK and did not extend to lettings by UK taxpayers in other countries in the European Economic Area.

To give UK FHL owners time to prepare for the new regime, Mr. Darling extended the special reliefs to UK taxpayers owning FHLs in other EEA countries for 2009-10 only.

Because of the General Election the FHL abolition clauses in his 2010 Finance Bill were lost in the truncated Parliamentary timetable. The Coalition has now said that the current FHL arrangements will not be abolished for 2010-11 onwards but that there will be consultations on the best arrangements going forward to make sure that the general rules are compliant with European requirements while at the same time preserving the advantageous rules for holiday property owners. These are seen to encourage tourism and therefore help with prosperity and employment in holiday areas.

In the meantime we have an area of enterprise in respect of which there are considerable tax advantages. What are these advantages?

  • If you make a loss on your holiday letting you can set it against other income under Self Assessment thus reducing your tax liability on other income of the same year or the previous tax year. This means effectively that the profits and losses are treated as arising from a trade.
  • 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.
  • 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.

What are the special conditions which distinguish an FHL?

  • the property must be available for holiday letting on a commercial basis for at least 140 days in the tax year;
  • it must be let for at least 70 days;
  • individual lets should not exceed 31 days
  • the holiday property must 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 must not exceed 155 days in a tax year.

We will have to wait for the consultation to end but we do now know that the Coalition appears committed to allowing the current advantages for FHL to continue.

As you will have gathered, the tax rules for Furnished Holiday Lettings are quite complicated and if you are thinking of investing in that way you should seek professional advice. The tax advantages are considerable, though, with a properly managed FHL providing a high income during the season, though of course there is much higher requirement for management and provisions of services as one would expect for an enterprise to be treated as a trade.

© Jon Stow 2010

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