Technical Briefings

17 March 2011

Furnished holiday lettings

Furnished holiday lettings - still worth the trouble?

When the EEA intervened, owners of qualifying furnished holiday lettings business looked set to miss out on the tax breaks they had previously enjoyed. They have been given a temporary reprieve but what benefits can owners look forward to now?

For many years owners of properties which satisfied the conditions to qualify as 'furnished holiday lettings' have been able to benefit from certain tax advantages including more flexible use of any rental losses made and additional Capital Gains Tax reliefs. These conditions included requirements as to the number of days the property should be available for commercial letting and actually let each year. Until recently only UK properties could qualify but when an EU directive meant that this treatment had to be extended to all properties within the EEA that otherwise met the qualifying conditions, the previous Labour Government announced that with effect from 6 April 2010 these benefits would be withdrawn.

The new Chancellor, George Osborne, announced in his first Budget in June 2010 that these reliefs would be reinstated on a temporary basis but at the same time gave advance warning of the introduction of more stringent qualifying conditions and likely restrictions on the ways in which losses could be claimed.  Further details were announced following a consultation period which ended on 22 October 2010. We now have the proposed revisions set to come into effect from 6 April 2011, subject to legislation to be included in the 2011 Finance Bill.

The new legislation is expected to :

• Confirm that properties within both the UK and EEA can qualify

• Increase the number of days that a qualifying property must be available for letting to the public from 140 days a year to 210 days

• Increase the number of days it must be actually let to the public from 70 days a year to 105 days

• Restrict the use of losses so that they can no longer be set against general income but can only be carried forward to be set against future profits from the same furnished holiday letting business

• Allow a 'period of grace' during which the owner of an existing furnished holiday lettings business may elect for the property to be treated as if it had qualified for one or two years if it would otherwise have qualified apart from the fact that, despite their best efforts, the owner has been unable to let it for the required number of days.

Without the availability of losses against other income, is there still an advantage in maintaining 'furnished holiday letting' status? Well, yes, there is. Expected to remain are:

• The availability of capital allowances on qualifying expenditure e.g. on plant and machinery used in the business

• Certain Capital Gains tax reliefs including Business Asset Roll-over relief and Entrepreneurs' relief.

• The inclusion of furnished holiday letting profits as 'relevant UK earnings' when calculating the maximum pension contributions on which tax relief is due

With lower interest rates than in previous years more landlords are more likely to be seeing profits from their rental properties at a time when the top rate of income tax stands at 50%. Property owners should therefore ensure that they maintain a record of all the expenses that they incur in connection with their letting so that these are not overlooked when the time comes to complete their self assessment tax return.

If the expenses are sufficient to give rise to a loss then this should always be claimed as although these losses can no longer be set against other income they can be carried forward to be set against rental profits which may arise in future years.

Joint owners should consider their ownership arrangements to see if there is scope to reduce the overall tax bill. Joint tenants own the property in equal shares and their taxable rental profit or loss will be allocated between them equally. Tenants in common may own the property in unequal shares, perhaps reflecting the proportion of the purchase price each contributed but certainly reflecting the way in which sale proceeds will be divided, but for tax purposes HM Revenue & Customs (HMRC) will assume that profits are divided equally. 

If the property is actually owned in unequal shares the owners can make a joint election, using form 17 (downloadable from HMRC's website) to have the rental profits or losses allocated between them in accordance with the proportion each person owns. The election can be made at any time but cannot be backdated, so to guard against this HMRC will regard an election as invalid if it is not received within 60 days of having been signed and dated.

There is still much that the careful property owner can do to minimise his or her tax liabilities and Wilkins Kennedy would be pleased to provide further advice.