Budget Changes to Furnished Holiday Lettings

Furnished Holiday Lettings attract various tax reliefs provided certain conditions are met. Budget 2009 introduced important changes to the rules, including their repeal from 2010/11, but are there still some planning opportunities to be found?

What are Furnished Holiday Lettings (FHL)?

Certain conditions must be satisfied if rental income, rental expenditure and capital expenditure are to be treated as falling within the FHL rules. A property must be furnished accommodation, let on a commercial basis with the view to making a profit and should be situated in the European Economic Area (EEA). There are also strict statutory criteria in respect of the availability of the property for letting and the period for which the property was actually let in any twelve month period, along with the requirement that there should not be a continuous period of letting exceeding 31 days to the same person in any seven month period.

What tax advantages are afforded to FHL?

Under the FHL rules, landlords are treated as though their qualifying FHL business is a trade for the purposes of loss relief, capital allowances and Landlords Energy Saving Allowance (LESA) along with certain capital gains tax reliefs, including business asset roll-over relief and entrepreneurs' relief. FHL income is also treated as part of net relevant earnings when calculating tax relief on an individual's pension contributions.

What changes were introduced by the 2009 Budget?

Prior to the 2009 Budget the definition of furnished holiday accommodation had only been afforded to 'UK property'. This has now been extended, meaning HM Revenue and Customs (HMRC) will now treat property situated in the EEA as included in the regime and eligible for any of the associated tax advantages. This was due to concerns that the difference in the treatment between properties in the UK, and properties elsewhere in the EEA could be considered discriminatory and not compliant with European law.

The extended relief, however, will be short lived as from 2010/11 the rules for FHL are to be repealed in their entirety.

FHL, as with any other property businesses, also have the potential to be eligible for Inheritance Tax (IHT) Business Property Relief, although claims are often unsuccessful as availability of this relief does require a high burden of proof on the taxpayer to show trading activity over and above that of a landlord. HMRC has not specifically confirmed whether the temporary extension of the definition of FHL will apply to this IHT relief.

What opportunities does this create?

The extension of the definition of furnished holiday accommodation is retroactive in its application and will allow individuals to make advantageous claims on property which they own or owned in the EEA prior to the Budget 2009, provided they are eligible to do so under normal time limits. In some cases, claims can be made back to the 2003/04 tax year. This is likely to be most beneficial to the taxpayer in respect of the availability of sideways loss relief for income tax purposes and business asset taper relief for capital gains tax purposes.

Eligible owners of property have until 31 July 2009 to amend their tax returns for a rebate in respect of income tax arising from sideways loss relief going back to the tax year 2006/07. This is an extension of the normal time limit for amending returns in respect of the 2006/07 tax year. HMRC states that claims dating back further than this will not be accepted on the grounds that tax returns would have been prepared on generally prevailing practice at the time of submission. It may be possible to argue, however, that the prevailing practice was based upon legislation that contravened the EC Treaty. If so, there may be a case for putting forward claims in respect of earlier periods.

The situation is more clear cut for capital gains tax, HMRC has confirmed that claims will be accepted from individuals who sold their overseas investment property in the tax years 2003/04 onwards, provided the place where the property was situated was an EEA member state at that time. Where non- business taper relief has been claimed, there may be the ability to benefit from the much more valuable business asset taper relief which can give a 75% reduction in the gain after two years of ownership for tax years until 2007/08.

The repeal of the FHL rules from 2010/11 also creates an additional window of opportunity. Individuals may wish to crystallise a capital gain on FHL prior to 6 April 2010 in order to take advantage of capital gains tax reliefs which will be unavailable after this date. In the current financial climate it is not envisaged that affected individuals will necessarily want to sell properties, but there are other options available which may warrant consideration, such as gifting properties.

Mike Warbuton, Senior Tax Partner at Grant Thornton says: "The temporary extension of the definition of furnished holiday lettings provides a window of opportunity to owners of property in the EEA. However, the repeal of the rules in their entirety is not good news for encouraging tourism, as those individuals currently taking advantage of the tax benefits offered may seek to sell up before the rules are scrapped."

Please contact us if you would like further advice on any of the above.