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This article appeared in the Yorkshire Post on Saturday, 30 May, 2009

Budget changes to tax treatment of holiday lettings

Richard Whitelock

Last month’s Budget hit the headlines with the proposed 50% rate of Income Tax for higher earners and the car scrappage scheme. However, many other changes were to be found in the Revenue Press Releases, one of which was an announcement to drastically change the tax treatment of qualifying Furnished Holiday Lettings (FHLs).

The Budget proposes to withdraw the beneficial tax treatment that applies to FHLs with effect from 6 April 2010. At the same time, in order to bring UK tax laws into line with EU law, FHLs situated within the European Economic Area (EEA) can now retrospectively benefit from the favourable tax treatment that has previously only applied to UK-situated FHLs.

Firstly, let us remind ourselves of what the tax advantages are for owning and letting qualifying holiday accommodation:

• Rental losses can be offset against other total income, which can often lead to an immediate tax repayment. This contrasts with the rule for ordinary lettings where losses can only be carried forward and offset against any future rental profits (which often means a lengthy time delay before any tax relief is received);
• Advantageous Capital Gains Tax treatment, including the possibility of claiming Entrepreneurs’ Relief on eventual sale (which can result in a Capital Gains Tax rate of 10% rather than 18% that applies on the disposal of ordinary lettings);
• Capital Allowances can be claimed on certain qualifying expenditure;
• Rental profits are counted towards “net relevant earnings” for personal pension contribution purposes

The fact that overseas letting properties can now benefit from these tax breaks means that owners of overseas letting property should review whether their property qualifies for FHL treatment. For a property to qualify, the letting activity must meet all of the following tests:

• The letting business must be carried on commercially with a view to profit
• The property must be available for letting to the public for at least 140 days per year
• The property must be commercially let to the public for at least 70 days per year
• Any periods of "longer-term occupation" (more than 31 consecutive days to the same person) cannot exceed 155 days per year

Although the above tests may appear straightforward, there can be some grey areas and certain pitfalls to watch out for. The “commerciality test” in particular has often been an issue on which the Revenue has successfully challenged that FHL treatment should not apply.

Complications can also occur if there is any personal use of the property, which includes allowing friends or relatives to stay at the property and pay no rent or a below-market rent, as this results in the need to apportion any expenses between the commercial and uncommercial use on a reasonable basis.

Having hopefully established that their overseas property meets the above qualifying tests, the owner should then consider what benefit could now be obtained by applying the FHL rules, either retrospectively or for the current tax year to 5 April 2010.

Let us consider the situation where an overseas letting meets these tests and has suffered rental losses in recent years. Prior to the Budget these losses could only be carried forward and offset against future overseas rental profits. Subject to passing the commerciality test, those losses can now be offset against other total income of the individual in the tax year of loss or the tax year before, which may result in a tax repayment rather than simply carrying the loss forward. Such a loss relief claim may involve amending previously submitted tax returns and must be made to the Revenue within certain time limits.

Given these rules will disappear in less than a year, what should owners of FHLs be doing in the meantime? Well, my advice to all FHL owners is to consider whether any steps should be taken before 6 April 2010 to ensure that they do not unduly miss out as a result of these changes, with two main points to bear in mind:

• If you are considering selling your FHL property within the next year or so, it may be advisable to sell before 6 April 2010 to benefit from the 10% tax rate, as opposed to 18% after 5 April 2010
• You may wish to consider accelerating any relevant expenditure in order to create, or augment, an income loss before 6 April 2010 (to take advantage of the loss relief or Capital Allowances rules)

If you own, or are considering owning, property of any kind, it is recommended that you seek professional advice.

Garbutt & Elliott are Chartered Accountants and tax advisers, with offices in Leeds (telephone 0113 273 9600), York (01904 464100) and Newcastle (0191 350 6155). Richard can be contacted at the York office, or by email to rwhitelock@garbutt-elliott.co.uk.