The proposed changes to the tax treatment of furnished holiday lets for 2011 have now been revealed but will we be winners or losers under the new Government’s plans?
Furnished holiday lettings enjoy special status allowing them to be treated as a trade for certain tax purposes. This is beneficial and gives furnished holiday lettings advantages over other types of letting. In particular, furnished holiday lettings are able to enjoy the more generous relief for trading losses, allowing losses to be set against other income rather than only against profits from letting.
They are also entitled to plant and machinery capital allowances on furniture, furnishing and fixtures used in the property as well as on plant and machinery used outside the property. Landlords of furnished holiday lettings also benefit from capital gains tax reliefs available to traders, such as rollover relief and entrepreneur’s relief.
However, there has been a large question mark hanging over the tax treatment of furnished holiday lettings for some time now. A technical note on the treatment of furnished holiday lettings in the EEA published at time of the 2009 Budget announced that the rules were to be withdrawn from 6 April 2010.
In the interim, the rules would apply to furnished holiday lettings in the EEA as to those in the UK. The plan to withdraw the rules was reiterated in the 2009 Pre-Budget report. However, the planned repeal did not happen.
In the Emergency Budget on 22 June 2010, the Chancellor announced that the current rules would remain in place for 2010/11 but that the Government would consult over the summer on plans to change the tax treatment of furnished holiday letting from April 2011. The consultation document has now been published and the proposed changes are outlined below.
The Main Changes
The consultation document proposes three main changes to the existing tax rules for furnished holiday lettings:
• increasing the minimum period that a property must be available to let to the public in order to qualify as a furnished holiday letting from 140 days to 210 days;
• increasing the minimum period for which the property must actually be let in order to qualify as a furnished holiday letting from 70 days to 105 days; and
• restricting the use of losses from furnished holiday lettings so that the loss can only be set against certain income from the same business.
Changes in Qualifying Conditions
To qualify for the more favourable tax treatment applying to furnished holiday lettings, certain conditions must be met. Currently, these are as follows:
• the property must be in the UK or the EEA;
• the holiday letting business must be carried on commercially with a view to profit;
• periods of letting that last for 31 continuous days or more (known as `longer periods of occupation’) must not exceed 155 days in the tax year;
• the property must be available for commercial letting as holiday accommodation to members of the public for at least 140 days in the tax year; and
• the property must actually let for at least 70 days (excluding lets of 31 days or more) as holiday accommodation.
The consultation proposes tightening the qualifying conditions by extending both the period for which the property must be available for commercial letting as holiday accommodation and the period for which it is actually let.
The minimum period for which the property must be available for letting as holiday accommodation is to be increased from 140 to 210 days. This extends the potential letting season by just over two months to nearly seven months a year. The period for which a property must actually be let is also increased, from 70 to 105 days in the tax year – an increase of about a month a year.
The furnished holiday letting rules were introduced in 1984 and the tighter letting conditions are partly attributed to changes in the tourism industry since the mid-eighties. The letting season has widened and as a result of variation is school holidays, the peak summer season has expanded combined with more lettings over the Christmas and Easter periods.
However, the increases are steep and it is questionable whether in the current recession landlords of properties that currently qualify would continue to meet the more stringent letting conditions beyond April 2011. However, this is only a consultation document and landlords and others have a chance to have their say.
In particular, the consultation seeks views on the impact of the changes on businesses and the availability of furnished holiday lettings as whole. It also seeks to ascertain the level of minimum occupation above which landlords will stop providing holiday accommodation.
Views are also sought on any regional and national impact that the proposal will have and whether there are regional and national variations in letting patterns. For example, do properties in hotter climes enjoy a longer letting period than those in wetter areas of England?
Changes in the Use of Losses
One of the main benefits of the existing furnished holiday letting rules is the application of the more generous trading loss relief rules as opposed to the stricter rules applying under the property income rules.
The availability of the trading loss relief rules allows any losses from furnished holiday lettings to be set against other income and gains. Under the property income rules, losses can only be set against other profits from the property income business.
The planned restriction in loss relief for furnished holiday lettings is severe. The consultation document proposes that:
• a loss from a UK furnished holiday lettings business would only be available to set against profits from a UK furnished holiday lettings business; and
• a loss from an EEA qualifying furnished holiday lettings business would only be available to set against profits from an EEA furnished holiday lettings business.
This means that not only would losses from furnished holiday lettings not be available to set against profits from other types of lettings, but also that losses from UK holiday lets could not be set against profits from a let in the EEA.
Again, comments are sought on the impact of the proposed changes. In particular, the Government is keen to ascertain the effect that the proposed restrictions would have on the furnished holiday lettings business and the type and proportion of business most affected by the restriction. Views are also sought on how the proposed restrictions to loss relief should be implemented and how losses brought forward should be treated.
From a planning perspective, landlords with unused losses should where possible use these before the new rules come into effect next April where possible, setting against other income and gains whilst it is still possible to do so.
In the main the changes are being made to cover the cost of extending the treatment to EEA holiday lets and to comply with EEA law. For those trying to make a living letting holiday accommodation in the UK, it is doubtful whether the proposals will be well received.
However, the beauty of a consultation is that allows people to have their say. Those wishing to comment must do so by 22 October 2010. The consultation document, which contains details of how to respond, can be found on the Treasury website (at www.hm-treasury.gov.uk/consult_holiday_lettings.htm). Whether the Government listens remains to be seen.
This article is from Property Tax Insider, a leading monthly UK tax magazine. Click here to slash your taxes today and get the first issue of Tax Insider for free.