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FHL and Entrepreneur's Relief

FHL and Entrepreneur's Relief

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I have recently taken on a client who has a UK rental property that has in the past been used as a furnished holiday let and also let as a residential property for longer tenancy periods. The property last qualified as an FHL a couple of years ago. It has never been her PPR and she is now looking at possibly selling the property.

Can anyone give me some guidance on two points.

Am I right in thinking that the capital gains computation would need time apportioning for years when it was and was not an FHL, effectively meaning that two gains are declared, one qualifying for Entrepreneur's Relief and one not?

Secondly, if the sale does not take place for about another year or more, would she lose all rights to Entrepreneur's Relief as the sale of the qualifying business asset (ie the property)  will be over 3 years since the qualifying FHL business ceased (based on info in HMRC manual CG64065). If this should be the case, would it be possible for her to delay the sale for a couple of years and rent it out as an FHL again to re-qualify for Entrepreneur's Relief?

Many thanks for any contributions.

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By Tax Dragon
31st May 2019 06:25

That's a question that requires someone to read legislation. The ER test (from memory... but this is the first bit of legislation to read) is that the asset was in use for the purpose of the business when the business ceased.

What needs the thought is what is meant by business - it could have different meanings in different sections. And remember that, unless something deems otherwise, there is only one business - the UK property business - that just happens to drift in and out of the FHL rules.

If she has other let property in the UK, you may also have to factor in that the UK property business has not ceased.

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By Trusted Tax Advisers
31st May 2019 09:44

Further to Tax Dragon's point, it should also be reminded that it's quite hard for a buy-to-let property rental business to be classed as a business for ER purposes.

ER is only available for those landlords that spend a significant amount of time managing their portfolio under recognised business principles (see Elizabeth Moyne Ramsey v HMRC)

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Replying to Trusted Tax Advisers:
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By Tax Dragon
31st May 2019 10:21

Well, TCGA s243(3) and (3A) would also be on the reading list.

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Replying to Tax Dragon:
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By Vile Nortin Naipaan
31st May 2019 11:26

Tax Dragon wrote:

Well, TCGA s243(3) and (3A) would also be on the reading list.

What are you talking about? S241(3),and(3A), surely!

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Replying to Vile Nortin Naipaan:
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By Tax Dragon
31st May 2019 11:50

I think you have answered your own question there. That's exactly what (TF) I meant.

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Replying to Trusted Tax Advisers:
Psycho
By Wilson Philips
31st May 2019 10:33

I think you'll find that the case had nothing to do with ER (and in fact she would not have been entitled to it). The question in that case was whether the activity amounted to a business, which is not the same as a trade - which is a prerequisite for ER.

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Replying to Wilson Philips:
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By Trusted Tax Advisers
31st May 2019 11:37

Yes, I am fully aware that the case in question was not to do with ER. My point being that it did raise a number of points relating to the practical application of carrying on a property business

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Replying to Trusted Tax Advisers:
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By Vile Nortin Naipaan
31st May 2019 11:45

But it's got SFA relevance to ER.

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Replying to Vile Nortin Naipaan:
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By Tax Dragon
31st May 2019 11:52

It must by F-F-F-Friday today.

Vile's winding up for the weekend.

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Replying to Trusted Tax Advisers:
Psycho
By Wilson Philips
31st May 2019 12:38

So why "ER is only available for those landlords that spend a significant amount of time managing their portfolio under recognised business principles"?

I think you'll find that most landlords spending a significant amount of time managing their portfolio under recognised business principles will not, in fact, be entitled to ER. Unless they happen to be FHL portfolios (in which case there would be no need to spend a "significant amount of time managing their portfolio under recognised business principles").

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By Vile Nortin Naipaan
31st May 2019 11:27

No. It needs to have been an FHL (deemed to be a trade) for the two years prior to disposal for the entire gain to qualify for ER. There is no apportionment of the gain (it is all or nothing, except in relation to associated disposals, in certain instances).

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Replying to Vile Nortin Naipaan:
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By Tax Dragon
31st May 2019 11:55

I gotta admit that this agrees with my gut instinct. But, starting at s169I(2)(b), I haven't yet reached that end point.

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By fawltybasil2575
31st May 2019 12:16

@ bigjel (OP).

1. No APPORTIONMENT concept of any sort will apply in your case (except in the seemingly unlikely future event that the property will qualify for PPR relief if there is any such PPR use prior to sale).

2. Furnished Holiday Lettings businesses qualify as trades, and hence (subject of course to their complying, throughout the period of trading, with the FHL rules) ER is potentially available.

3. In order to obtain ER, it is a legitimate (CGT-saving) tactic to use a previously “non-FHL” property as an FHL business, for a period of at least 12 months prior to the closure of the FHL business (the property itself can be sold within 3 years of the closure of the trade, albeit in practice the sale would take place well within that period).

4. In your case there is (or so I assume) only the one property, which is good. If there had been two or more FHL properties, then ER might not be available (arguably) on the disposal of one of two or more FHL properties, since the FHL business would not have closed on the disposal of only the one property.

In similar vein, one should ensure that, upon the disposal of the FHL property, it is not replaced by the acquisition of another FHL property (since HMRC might contend that the FHL business was not being closed).

In short, and in reply to your asking:-

"Would it be possible for her to delay the sale for a couple of years and rent it out as an FHL again to re-qualify for Entrepreneur's Relief?",

the answer is, in her case, definitely "Yes" (unless conceivably of course there is a change in the legislation in the meantime).

Basil.

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Replying to fawltybasil2575:
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By Vile Nortin Naipaan
31st May 2019 12:32

I don't completely agree with your 3 Basil. If the FHL business cease, but (non-FHL) rental activity continues, then the disposal will be of a business (or part of a business) that won't then qualify. Additionall, the period of FHL use must now (since 6/4/2019) be two years (not 12 month, as you say).

Also, I think your 4 is a little off, as each FHL is a part of a business. Being part of a business would preclude your 3 from applying, of course.

Your unnumbered 5 though is complete b0ll0x. Well HMRC might argue the point, but the argument would be b0ll0x for much the same reasons.

Actually, I come to the conclusion that your post is 50% unnecessary c0ckwaffle. for

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Replying to Vile Nortin Naipaan:
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By Tax Dragon
31st May 2019 12:33

But... put the sections together: (you don't need me to tell you, but for some others it's s169I(2)b), s169S(1) and (especially) s241(3) (and 3A)).

I'm not sure a completely agree with your partial disagreement of what the father of the house said.

Edit: My reply was to your pre-edited post.

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Replying to Tax Dragon:
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By Vile Nortin Naipaan
31st May 2019 12:36

That's because you're confusing "ceasing to be carried on" with "ceasing to be deemed a trade".

EDIT: It wasn't edited. I'd just clicked on post before I'd finished thinking about it!

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Replying to Vile Nortin Naipaan:
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By Tax Dragon
31st May 2019 12:49

The risk of such confusion was very much in my mind when I posted my initial reply (about needing to read legislation and there being one business that drifted in and out of being a deemed trade). So I'm very annoyed if, having warned myself against being confused, I then became confused.

S169S(1) says "business" means "trade". Reading that back into s169I, crossing out "business" and inserting "trade"... is it so clear? Can a business not continue after a trade has ceased?

Edit: pre-extended, then.

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Replying to Tax Dragon:
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By Vile Nortin Naipaan
31st May 2019 13:02

I think the devil is in s 241.

Let's assume that Mr X has two properties , A and B. A is in Sheffield, so it is never an FHL (who the fuch wantrs to go to Sheffield), and B is in some 5h1th0le in Cumbria that is sometimes an FHL, because it's kind of near the Lake District, but sometimes isn't.

We have a business that comprises A and B. s 241 tells us that for CGT purposes B is it's own trading business. We're going to make a disposal of B in a tax year when it's not an FHL.

BANG! We have a disposal! Do we have a business for the purposes of ER? Well within the two years it was a business, but did the business cease, as is the requirement of the legislation. No, it ceased to be a business, which is a differnt thing from the business ceasing. IMO

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Replying to Vile Nortin Naipaan:
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By Tax Dragon
31st May 2019 13:13

What if you dispose of B in a year in which it was an FHL?

(PS... you're suggesting that anyone wanting to visit Sheffield would want to stay there more than 30 days. I hadn't realised it had so much to offer.)

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Replying to Tax Dragon:
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By Vile Nortin Naipaan
31st May 2019 13:21

Tax Dragon wrote:

What if you dispose of B in a year in which it was an FHL?

Then you have a disposal of a business within s 169I(2)(a), which is why I take such issue with Basil's BS. I just don't see you getting within s 169I(2)(b), because either it is an FHL for a tax year (or part of a tax year where it is acquired or disposed of) or it isn't.

And nobody WANTS to stay in Sheffield for any period of time. It's just some people have to and they tend to be confined there for periods in excess of 30 days.

If you stop all activity for an extended period, then maybe there's a cessation, but that's never going to happen. Either it stops being an FHL and becomes a non-FHL or you're selling it at a point in time when it's still an FHL.

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Replying to Vile Nortin Naipaan:
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By Tax Dragon
31st May 2019 13:43

But the property business is not a business within s169I(2)(a). Only the FHL in isolation meets the criteria.

If you have to isolate it for the purpose of 2(a), why is it not also isolated for the purpose of 2(b)?

(Corrected for errors.)

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Replying to Tax Dragon:
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By Vile Nortin Naipaan
31st May 2019 13:49

If the isolated part ceases, it has ceased. But it does not cease if it ceases to be isolated.

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Replying to Tax Dragon:
Psycho
By Wilson Philips
31st May 2019 13:51

I'm inclined to agree. Section 241 brings the business (or that part of the business) into section 169I. If the FHL ceases then I would argue that the 'business' (within the meaning of 169I) has ceased to be carried on. In layman terms, if I have a property let on FHL terms and then decide to let it as a long-term dwelling then, while my property business may well be said to continue, I think I'd be no less correct in saying that my furnished holiday letting business had ceased.

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Replying to Wilson Philips:
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By Vile Nortin Naipaan
31st May 2019 14:06

The issue though is has the FHL ceased, or has it ceased to be an FHL? And in both cases the next question is when, because FHL is a mere definition that applies on a tax year by tax year basis (or on acquisition and disposal in relation to the 12 month period beginning with acquisition/ending with disposal).

If property B was an FHL in 2017/18 (because it satisfied the definition for that year) but wasn't in 2018/19 (because it didn't) and is now sold in 2019/20 (still not being an FHL), then I don't think s 241 goes far enough to deem there to have been a cessation (presumably at 5/6 April 2018) to bring the current disposal into s 169I(2)(b). I think you have a disposal where one of the conditions in s 169(2)(a) is not being satisfied.

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Replying to Vile Nortin Naipaan:
Psycho
By Wilson Philips
31st May 2019 14:17

It's an interesting discussion and I don't really know the answer. But my thinking is thus.

What is the "business" to which 169I refers? The physical property business or the 241-deemed trade? My view, given that "business" for the purposes of 169I has a specific meaning, as defined at 169S, is that it is the latter. So that when the FHL stops then, for the purposes of 169I, the business referred to therein has ceased to be carried on.

But it's only my intepretation.

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Replying to Wilson Philips:
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By Tax Dragon
31st May 2019 14:35

Wilson Philips wrote:

But it's only my intepretation.

Not only yours.

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Replying to Tax Dragon:
Psycho
By Wilson Philips
31st May 2019 14:50

It does beg the question, though:

What would happen if, say, FHL conditions were met in year 1, just failed in year 2, and then met again in year 3, when the property is sold?

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Replying to Wilson Philips:
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By Vile Nortin Naipaan
31st May 2019 14:49

I think that where you say "when the FHL stops", you need actually to say "when the FHL stops being an FHL", because that is one of the issues.

My issue is that nowhere in s 169I or 169S, or, more importantly, s 241 is the point explicitly made.

And except in circumstances where an election could be made under ITTOIA 2005, s 326 or 326A (still holiday accommodation but "underlet"), where the property goes on to be let otherwise than as holiday accomodation, it seems to me to be perverse that it should qualify for ER.

Further, if you have one FHL and it stops being an FHL, but is sold within 3 years, it gets FHL, by your analysis. If you have two FHLs though and one of them stops being an FHL, and is later sold you don't get FHL. That surely has to be nonsense?

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Replying to Vile Nortin Naipaan:
Psycho
By Wilson Philips
31st May 2019 14:56

I'm not sure that it is nonsense. It's no different to any other business/trade whereby you will not get ER on disposal of an asset whilst the trade continues - only when the trade actually ceases.

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Replying to Tax Dragon:
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By Tax Dragon
31st May 2019 14:02

Tax Dragon wrote:

If you have to isolate it...

"Have to" is otiose. But I've corrected the post once already.

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Replying to Vile Nortin Naipaan:
Psycho
By Wilson Philips
31st May 2019 13:36

It's similar (although apparently the reverse) to the case of shares in a company. In a client case the company had been a trading company but had acquired significant investments such that it ceased to be a trading company. HMRC unsuccessfully argued that the company had not ceased to trade within the 3 years prior to sale. It hadn't of course - it continued to carry on the trade, but that is not what the law requires - which is that the company ceases to be a trading company, as defined.

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Replying to fawltybasil2575:
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By Mrbailey
03rd Jun 2019 14:44

I agree with you Baz. YOU espouse fiscal wisdom with coherent articulation

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Replying to Mrbailey:
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By Tax Dragon
03rd Jun 2019 15:40

Mr Bailey! It's bizarrely good to hear from you. I thought you might have moved on to meet the tax collector in the sky.

'Baz' might feel differently... there's nothing like an endorsement of one's view from Mr B to undermine one's confidence in that view... :-p

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By Tax Dragon
31st May 2019 12:53

You realise that at some point the OP is going to tell us the business was carried out by a company.

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By Vile Nortin Naipaan
31st May 2019 13:04

That is what usually happens.

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By fawltybasil2575
31st May 2019 12:57

@ PNL (your post at 12.32).

In apologising for any inadvertent reference to the 12 months, I am (with respect of course) compelled to say that I in turn disagree with ALL your other criticisms, and I stand RESOLUTELY behind ALL other points made in my last post.

You have unfortunately, albeit no doubt inadvertently, misinterpreted my SEVERAL references to POTENTIAL different interpretations by HMRC.

Your penultimate paragraph, ie:-

"Your unnumbered 5 though is complete b0ll0x. Well HMRC might argue the point, but the argument would be b0ll0x for much the same reasons"

is self-evidently an unfortunate "contradiction in terms" :)

Taking your last two paragraphs together, I regret that (in REAFFIRMING the comments in my opening paragraph above) I have neither time nor inclination to engage at that level of debate.

Basil.

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Replying to fawltybasil2575:
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By Vile Nortin Naipaan
31st May 2019 13:05

fawltybasil2575 wrote:

I have neither time nor inclination to engage at that level of debate.

Ha! So, you admit you're wrong!

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