Claim your place in the sunshine
1 Feb 10
Changes coming in this April will have a major effect on the tax status of furnished holiday lets, both in the UK and elsewhere in Europe. Time is running out for any retrospective claims
by John Craddock
For better or worse, and with the exception of anti-avoidance measures, most tax legislation tends nowadays to be announced in advance of the Budget Statement and Finance Bill. Nevertheless, there always seems to be at least one announcement which, come Budget day, contains an element of surprise.
In the 2009 statement, such an announcement was found in a supplementary technical note entitled Furnished Holiday Lettings in the European Economic Area. The note explains that the historic restriction of Furnished Holiday Lettings (FHL) treatment for UK tax purposes, to UK-based property “may not be compliant with European law”. As a result, two significant changes arise:
• with immediate (and retrospective) effect, a widening of the qualifying area, to all EEA nations
• a stated intention to repeal FHL legislation, with effect from 6 April 2010. The legislation to repeal FHL rules will follow in the 2010 Finance Act, subject of course to any subsequent budget announcements following a possible change of government. The 2009 Pre-Budget Report did not affect these measures.
Current FHL rules
Properties qualifying for FHL treatment, under Income and Corporation Tax legislation, need to meet the following criteria (ITTOIA 2005, s.325 for Income Tax purposes, ICTA 1988, s. 503-4 for Corporation Tax purposes), in addition to an over-riding need for the letting business to be on a commercial basis, with a view to realisation of profits:
• the property must be situated in the UK (now of course extended to EEA)
• the property must be available for commercial letting as holiday accommodation to the public for at least 140 days during the relevant 12-month period
• the property must be actually let, on the terms outlined above, for 70 days in the relevant 12-month period, subject to averaging for multiple properties
• longer-term occupancy (i.e periods of continuous occupation of more than 31 days to the same person) does not represent commercial letting as holiday accommodation and no more than 155 days can consist of longer-term occupancy.
Implications of FHL treatment for UK tax purposes
Several notable tax benefits are available where these criteria are met, compared with the general principles of taxing a property business:
• the letting activity effectively becomes a trade
• capital allowances are available on furniture and furnishings
• loss relief rules apply, as for trading entities
• certain capital gains tax (CGT) reliefs, notably roll-over, hold-over, entrepreneurs’ relief and historically, business asset taper relief, are available.
Trades and deemed trades
It is worth remembering that, by reference to meaning of “trade” in the Taxes Acts and the circumstances of a particular case, an activity consisting of providing holiday accommodation may amount to a trade, without recourse to the rules outlined above. This would apply to a bed and breakfast/guest house type of activity, in which case there will be continuity of treatment in tax year 2010/11 and beyond.
Action points
1. REVIEWING NON-UK EEA PROPERTY BUSINESSES
Not all EEA-situate property which is wholly or partially let will meet the criteria outlined above. However, where the conditions are met, it is clear from the budget announcement that retrospective claims can be made, subject to normal time limits. For losses and capital allowance claims, this is typically the tax return amendment deadline, although longer time limits of five years 10 months from the end of the tax year apply to CGT reliefs. A review should be undertaken where an EEA property meets the conditions on or after 6 April 2008, or, for CGT purposes, such a property was so let and disposed of on or after 6 April 2003.
2. FORWARD PLANNING
Whether a UK or EEA-situate qualifying FHL is involved, now is the time to consider whether action is required in advance of the 6 April 2010 legislation change. This decision will of course be based on a combination of tax and other considerations, but some of the taxation issues that may be relevant are:
• the Annual Investment Allowance, for Capital Allowances claims
• ensuring entrepreneurs’ relief is available on a disposal
• holding over gifts
• selling and replacing property, using roll-over relief.
Conclusion
Not for the first time has the issue of EU discrimination resulted in the removal of favoured UK tax legislation. This announcement will come as a bitter blow to UK holiday accommodation owners, some of whom will still be coming to terms with steep falls in property values. Any advantageous planning that can be undertaken prior to the changes coming into effect this April is likely to be well received.
JOHN CRADDOCK is a senior tax consultant with Professional Tax Consultancy Ltd (PTC).