Holiday homes face tax squeeze
HMRC is consulting on its plans for new legislation to replace the current Furnished Holiday Lettings (FHL) regime. Rebecca Benneyworth looks at the current plans and offers her suggestions. Add your views here to influence the rules – consultation is open until 22 October.
The current tax rules allow furnished holiday letting to be treated as a “quasi trade”, with loss reliefs available as if the activity were a trade and a number of CGT reliefs applying to disposals. Those letting out homes can also claim plant and machinery allowances for expenditure on furniture and equipment under the Annual Investment Allowance.
The changes are needed because the regime needs to apply to the rest of the European Economic Area rather than the UK only. If extended as they currently stand, the FHL rules would be a serious drain on tax revenues as owners of holiday homes abroad offset any losses incurred against UK income.
Holiday homes are an important part of the UK tourist industry and provide jobs in rural areas throughout the country. The Treasury has a difficult task to come up with new legislation that satisfies Europe without damaging the UK economy, but also minimises the potential for inappropriate exploitation of the new rules.
The latest FHL proposals (1.9MB PDF) seek to tighten up the conditions under which the favourable tax regime can apply, and to modify the rules on loss relief as follows:
- A qualifying property must presently be available for letting to the public for 140 days a year. It is proposed that this is increased to 210 days a year – 30 weeks.
- A qualifying property must actually be let to the public for 70 days a year – this will increase to 105 days or 15 weeks.
- Losses made in a UK or EEA FHL business will be restricted so that they can only be set against profits from the same FHL business. This ends the favourable loss relief available on FHL activities.
Other proposals formalise the treatment of capital allowances. Under the FHL rules, a property would need to be available for normal renting activity in order to claim capital allowances in the year; strictly there should be a disposal of the assets on which allowances are claimed, but no longer qualify. HMRC has taken a concessionary approach when a property fails to qualify for what is anticipated to be a temporary period, but this approach needs formalising.
The new capital allowance rules propose that the plant which qualifies under the FHL regime, but not under normal letting rules, is maintained in a separate pool or pools. No allowances are granted in periods for which the property does not qualify, but additions to and disposals from the pool are dealt with in the period, the written down value being brought “on stream” again when the property once again qualifies.
The full article discusses some of the problems within the FHL proposals, including the practicality of the increased availability/occupancy rates, the treatment of losses incurred by commercial holiday lettings businesses and the potential complexities of the capital allowances rules. If you would like to help us prepare a response for the consultation, log into AccountingWEB and either add your comments on this article, or send them to us by email to firstname.lastname@example.org