Q. I currently own a property in Cornwall which I let out fully furnished to tourists throughout the year. A friend of mine, who also lets property not only in the UK but in France, has told me that changes to the way in which income from Furnished Holiday Lettings (FHL) are taxed is being introduced. Is this correct and, if so, what changes are being made and when do they come into force?
A. The changes to the tax legislation on FHLs come into force on 6th April 2012 and the reforms are being made to bring the UK in line with European law. The changes have been some two years in the making and whilst some aspects of the favourable tax regime applying to FHLs are retained some new more restrictive conditions and amended loss relief provisions will make the regime a lot less generous.
Here is a basic summary of the main changes that will apply from 6th April 2012.
The favourable tax regime applying to FHL activities within the UK is extended to properties in the European Economic Area (EEA). This treatment has been in place for some time, but has been concessionary until now. The amendments also extend to Capital Gains Tax (CGT) to allow EEA FHL activities to benefit from the CGT reliefs available to UK FHL operations.
Those who have FHL properties in both the UK and EEA will have to segregate income and expenditure keeping separate records for both capital allowances purposes and for the purposes of loss relief (see below).
The periods for which a property must be available for letting and actually let increase with effect from April 2012 as follows:
• the property must be available for letting for 210 days in a tax year (up from 140 days); and
• the property must be actually let for 105 days (up from 70 days).
However, the letting test must be applied separately to UK and EEA accommodation – these two sources are separate for all purposes.
The ability to average across properties owned by the operator to meet the qualifying periods remains in force, but there is no averaging between UK and EEA properties. The taxpayer can elect which properties are included in the averaging election and which are not.
Where a property fails to qualify only by virtue of the number of days actually let, a person can elect that the property is to be treated as meeting that condition in the two years following a year in which the condition was actually met. An election is necessary in the first of those years in order to be available in the second. The property must have qualified in one year (the base year) which is 2010/11 or a later year which means that qualifying under the lower limits in 2011/12 gives access to two years period of grace when the new higher limits come in.
Note that there is no period of grace in respect of the period of availability. If this is breached, the property will fail to qualify in the period.
The change to loss relief for FHL losses applies from April 2011. Therefore losses incurred on FHL activities can, from 2011/12 only be set against future profits of the same trade, treating EEA and UK activities as separate businesses. There are no sideways relief provisions allowing offset against other income, nor is there terminal loss relief on cessation of the business.
With regards to Capital Allowances on furnishings and equipment within the FHLs from April 2011 where a property ceases to qualify as an FHL in a period, but it still let, and becomes normal furnished letting, the capital allowances rules have been modified to provide that there is a deemed disposal and acquisition at market value of assets in the pool, so that a balancing allowance or charge is taxed on the owner. The market value is capped at the original cost of the assets for this calculation.
When a property starts to qualify once more as FHL, the owner may wish to treat those assets as reacquired by the FHL business as the availability of capital allowances is more favourable. The operator will therefore probably seek to treat the assets as once again acquired at market value. If the owner has a multi property site then this will require some detailed record keeping too allow adjustments to be made where necessary.
The above is a brief overview of the main areas of change but should you need any further advice then please contact our tax consultants are available on 01455 852550.