The tax rollercoaster on Furnished Holiday Lettings continues. The previous government had stated that the furnished holiday lettings (FHL) rules would be withdrawn with effect from 6 April 2010. However it has been announced at the Emergency Budget that this change will now not take place. The rules will allow holiday lettings that meet certain conditions to be treated as a trade for some specific tax purposes.
This is great news for all the individuals, partnerships, trustees and companies who let furnished holiday accommodation situated within the UK or anywhere else within the European Economic Area (EEA).
So what are the advantages?
Income Tax advantages
- Losses from a qualifying Furnished Holiday Let (FHL) can be set against other taxable income in the current or previous tax year. For a property rental not qualifying as a FHL a loss incurred can only be set against other rental income rather than all taxable income.
- Profits from a FHL are treated as earnings for pension contribution purposes.
- Capital allowance claims for expenditure on furniture and furnishings are available on a FHL. Such items as washing machines, kitchen equipment, bathroom and sanitary wear, central heating, furniture, furnishings and insulation will qualify for either Plant & Machinery allowances or Integral Features allowances. The existing rules allow the first £100,000 of qualifying expenditure for Capital Allowances to obtain the “Annual Investment Allowance” and a 100% tax write off.
- Currently the FHL profits or losses do not necessarily have to follow the ownership of the property. This can have tax benefits. Profits can be taxed at lower rates when co-owners or spouses suffer tax at differing rates.
Capital Gains Tax advantages
- Holdover relief can be available on a gift of the property. This allows assets to be gifted down a generation and defer any Capital Gains Tax payment as the Capital Gain is “held over”.
- Rollover Relief is available for a FHL. There is a list of qualifying assets that benefit from Rollover Relief. The tax advantage is that a gain realised on sale of a FHL could be “rolled into” the purchase of another qualifying asset within a time limit. For example provided all the rules were met business premises could be sold and the gain rolled over in the purchase of a FHL. Alternatively a FHL could be sold and the gain rolled over into another FHL or a qualifying business asset.
- Gains realised on FHL sale can qualify for Entrepreneurs’ Relief and the effective 10% tax rate it brings. This is a favourable rate compared to a rate of 28% (for higher rate tax payers) incurred on gains from non-business assets after 22 June 2010.
The Furnished Holiday Letting rules will continue to apply during the tax year ended 5 April 2011 in the same way as they previously applied. However, the government is considering introducing changes to the rules with effect from 6 April 2011. This might include increasing the number of days that qualifying properties have to be available and actually let as commercial holiday letting.
For further advice on the current tax rules and how to use these to your benefit please contact Alan Taylor or Andy Ritchie, Campbell Dallas LLP 01738 441888.