If you are buying a property with your spouse or civil partner or even just a business partner and you intend to let it out, make sure your solicitor or conveyancer knows this and arranges the most suitable ownership status. Generally for tax reasons this will be as tenants in common. As a tenant in common you will each own a specific share of the property, which may be half, or a different specified percentage.
The other sort of joint ownership is known as a joint tenancy. In that situation each person owns an indivisible share of the whole property and cannot pass a share to another person. In the event of the death of one of the owners of a property held as joint tenants, the ownership of the property passes to the survivor, and this cannot be changed by a gift by will.
A joint tenancy may not be a good idea from the point of view of the survivor in terms of inheritance tax planning as it may be liable to significant IHT on the death of the survivor. If gifted on by the survivor it would require that person to live seven years after the gift to avoid an inheritance tax charge on death. Whether or not a property is owned by a married couple, it is a very inflexible arrangement.
The terms and types of ownership in Scotland are different from those already mentioned, which apply to England and Wales, but the same situations as above are provided for.
Having a property owned by people as tenants in common gives more flexibility. Firstly, the property doesn’t have to be owned on a fifty-fifty basis. It can be owned in whatever percentages may be agreed, such as 75:25 or 95:5. Actually several people could have a distinct share of a property. A person’s share could be willed to someone other than a joint owner if desired, or if one married person or civil partner wanted to leave the share to the other, then a will would take care of it with no difficulty. The point is that there would be room to plan who should inherit and at the same time take account of inheritance tax considerations.
A share of a property owned as tenants in common can be sold or transferred to another party. A gift to a spouse / civil partner would not attract capital gains tax, though a sale to a non-spouse would (if there were a gain) and a gift to a non-spouse / civil partner would be valued at the market rate for capital gains purposes.
You will see that the distinctions between joint tenancies and tenancies in common are important for tax purposes. A joint tenancy arrangement has much less flexibility. If you need to understand more about the nature of these distinctions you should take legal advice. In the next article we will be discussing the income tax issues relevant to the two types of ownership.
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.
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.
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
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.
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.