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Furnished Holiday Lettings – where are we now?

Under the Furnished Holiday Lettings (FHL) rules, income received from furnished holiday accommodation has historically been treated differently for tax purposes from rental income derived from other sources. This advantageous situation was set to change for 2010/11, with the announcement that the FHL rules were to be repealed, but a partial reprieve may be at hand...

Plans to abolish the special tax treatment of FHLs were subsequently themselves abolished in the fast-tracking of legislation ahead of the General Election. In the Emergency Budget, the Coalition Government confirmed that the proposed withdrawal of the rules would not take effect, but announced a consultation on changing certain elements of the rules.

The current situation

The FHL rules allow qualifying properties to be treated as trading businesses for tax purposes. For a UK holiday home to be considered an FHL for tax purposes, it must:

• be available for commercial holiday letting to the public for at least 140 days during a relevant period (for existing businesses, this is the tax year to 5 April; for new businesses it is the 12 months following the first day of letting)
• be occupied for at least 70 days during a relevant period and be fully furnished to the extent that guests do not need to provide any additional furnishings
• not be occupied by longer term lets for more than a total of 155 days during a relevant period.

Last year the Government extended the treatment to landlords with FHLs inside the European Economic Area.

The tax advantages

Owners of FHLs that meet the necessary conditions can enjoy a range of tax benefits. These include the favourable treatment of losses, which can be set against other income in the same way as trading losses. FHLs can be treated as trading rather than investment properties for capital gains tax (CGT) purposes, making them eligible for Entrepreneurs’ Relief, rollover relief and certain other CGT reliefs. In addition, profits from FHLs can count as relevant earnings for pension purposes.

In the case of FHLs, capital allowances may also be claimed on expenditure on plant and machinery. This includes furniture and furnishings in the property, as well as plant and machinery used outside the property, such as vans or tools, but not the cost of the property itself or the land on which it stands.

What the future holds

The Coalition’s consultation document proposes a number of changes that reduce the benefits of the existing FHLs treatment. These include:

• increasing the minimum period for which the property must be available for commercial letting as furnished holiday accommodation during the tax year from 140 to 210 days;
• increasing the minimum period for which the property must actually be let as furnished holiday accommodation during the tax year from 70 to 105 days; and
• restricting the use of losses from a furnished holiday lettings business.

The consultation will close on 22 October 2010.

Draft legislation is to be published following the consultation and the measures, which are expected to take effect from April 2011, will be legislated for in the Finance Act 2011.

For further information and advice on tax and property, please contact us. We will be delighted to assist you.

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