Reprieve for tax relief on furnished holiday lets?

During the second reading of the Finance Bill 2010, the Treasury confirmed that the Government had withdrawn its repeal of the furnished holiday lettings (‘FHLs’)  relief from the Finance Bill.  However, the then Labour Government clearly stated that if it was re-elected it intended to include the proposed withdrawal of the relief in the second Finance Bill at the start of the new Parliament. 

The Conservative’s prior to the election had stated that they would not remove the tax breaks afforded to FHLs, and therefore the relief, if it survives the Emergency Budget on 22 June 2010, is something worth exploring for taxpayers with qualifying property.

What is the relief?

FHLs relief provides that landlords who earn income from furnished holiday accommodation in the UK are treated as if they are trading for tax purposes. This means that they are entitled to:

• claim loss relief as if the FHL was part of the UK property rental business constituted a trade;
  
• treat the relevant assets as trading assets (relevant for certain purposes including roll-over relief, gift hold-over relief and relief for loans to traders);
  
• claim plant and machinery allowances on applicable capital expenditure, even though the properties are used for accommodation (which would normally be excluded); and
  
• include such profits as relevant earnings for calculating the maximum relief due for an individual's pension contributions.
  
• Additionally, the FHL may qualify for business property relief as long as the owner plays an active role in the management of the tenancies. 

Conditions for relief

Certain conditions must be met in order to qualify for FHL relief:

• The property must be situated in the EEA;
  
• The accommodation must be let (i.e. leased or licensed) on a commercial basis with a view to making a profit.  Therefore, letting the property to a relative for a nominal rent will not qualify;
  
• The accommodation must be furnished and the person using the accommodation must be entitled to use the furniture;
  
• The property must be available for commercial letting as holiday accommodation to the public for at least 140 days during the tax year;
  
• The property must be actually let commercially as holiday accommodation to members of the public for at least 70 days during the tax year.  A letting for a period of longer term occupation is not a letting as holiday accommodation for the purposes of this condition; and
  
• The accommodation must not be in "longer term occupation" by the same person (or people) for more than 31 days in the tax year except where the longer term occupation is as a result of abnormal circumstances.

There is a risk that even if the business does qualify as a FHL, HMRC may resist a loss claim on the basis that it is a “hobby” and not a genuine business.  However, given the potential tax savings the availability of the relief is still worth exploring.

Loss relief explained

Losses can be set against total income and are not just restricted to the FHL business: any income tax losses arising in the FHL business may be relieved either sideways or backwards against general income. 

Sideways loss relief

A person who makes a loss in a trade, profession or vocation may claim for the loss to be offset against their other income and capital gains.  This is known as “sideways loss relief.”

Where a taxpayer lets property as a FHL and makes a loss on all properties let as furnished holiday accommodation taken together, they can set that loss against their general income for either the tax year in which the loss was made and/or the previous year.  

However, the amount of the loss that can be offset against other income is capped at £25,000 if the taxpayer has not spent on average 10 hours per week in the relevant tax year personally engaged in the activities of the FHLs business.  Additionally, those activities would have had to be carried on on a commercial basis with a view to making a profit. 

Carry back loss relief

When a taxpayer first lets a property as a FHL and they make a loss in any of the first four tax years, they can set this loss against their other income of the three tax years before the year of the loss.  This means that a taxpayer could potentially get back tax paid on income received before they started the FHLs business. 

Furnished holiday letting losses set against capital gains

If a taxpayer’s FHLs losses exceeds their income they can choose to set these losses against their capital gains. 

Business property relief (‘BPR’)

A detailed analysis of BPR is outside of the scope of this article but generally BPR applies to "relevant business property" which includes property consisting of a business or an interest in a business.  The business must be a trading business: the relief does not apply to an investment business.  In this context business includes a business carried on in the exercise of a profession, vocation or trade but does not include a business carried on 'otherwise than for a gain.'  There is no specific statutory right for BPR to apply to FHL's and most guidance is derived from case law and HMRC's IHT manual.

In relation to FHLs, the key rests with the level of services provided to the holidaymakers by the property owner/agent during their stay in determining whether it is a business for BPR purposes. For example, a fishing cottage where the owner takes the guests on pre-arranged fishing trips in his boat or similar properties with owner/agent arranged activities such as hunting, climbing lessons, scuba diving, skiing etc are more likely to qualify for BPR than a property which is simply let out with no ancillary services provided. 

Conclusion     

With the ever increasing tax rates FHLs relief can be a useful tool in reducing the overall tax bill, by allowing losses to be offset against the taxpayer’s other income or capital gains.  Additionally, a FHL may also be efficient from an inheritance tax perspective depending on the level of services provided to holidaymakers.  This article provides an overview only and should not be relied on without seeking professional advice.

Alexandra Davies