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Furnished holiday

Non qualifying years

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Ignoring period of grace and averaging elections, whats the implications of a FHL meeting the qualifying conditions in some years and not in other years.  When not meeting the criteria, should it be reported on the normal UK property income pages of the return and only use the FHL pages when qualifying. This would in effect separate any  losses arising.

Is the capital gain on sale pro-rated between qualifying and non qualifying years?

If going forward, the property is not going to qualify as an FHL and is only let out for say 2 months a year, can expenses for the whole year be deducted? (No private use).

 

 

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By The Dullard
14th Jan 2022 16:18

Technically, an FHL is just a part of the overall property business and HMRC's separating them on the tax return is an artificial means of making the calculation required in ITTOIA 2005, s 327. If you refer to s 327(2) though, the calculation isn't necessarily required.

FHL is just a definition though. For any given tax year, the definition might be satisfied or it might not. So, ignoring the period of grace election, etc, any given property might fall within the definition in one year and without it in another (with potential capital allowances consequences).

Technically, losses when the property is an FHL are trade losses (and when the property is not an FHL they are property losses), and you can't set b/f trade losses against current property profits. HMRC think you can though

However, FHL profits are not deemed to be trade profits, so you can set b/f property losses against current property profits, which HMRC accept.

Weirdly, HMRC also accept that if you have losses on non-FHLs you can set them against your current year FHL profits, because the FHLs are part of the same property business and the losses would offset in the process of aggregating the results of the single property business. They've put a box on the tax return to facilitate this.

However, they don't accept that losses from the FHL part (where the losses don't arise from capital allowances) can be set against profits of the non-FHL part of the same property business in the course of aggregating the results of the single property business. They think a claim is necessary under ITA 2007, s 64 to effect the offset, and such a claim is precluded by s 127(3A).

For CGT purposes, the only difference it makes is whether BADR is available, which will only be the case if the FHL definition is met in the two years preceding disposal (which might conceivable span into 3 tax years).

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Replying to The Dullard:
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By pauld
14th Jan 2022 16:38

Thanks Dullard for your reply. That's nice and straightforward then !!!! What about reporting on the tax return. For the first couple of years property qualified as FHL but for the 2 years pre covid did not. I have only just found this out. (my mistake for not asking the client every year) and is unlikely to qualify for the foreseeable. Do I continue to report on FHL pages or switch it to the normal prop pages? This is the only property they let out. If I do not need to switch pages, looks like I will lose the losses b/forward?

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Replying to pauld:
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By The Dullard
14th Jan 2022 18:10

Yes. My bad. I thought HMRC's view was that FHL losses c/f on the same property could be offset, but they do say they can't in the Property Income Manual (PIM4120).

So, I think you have to switch to non-FHL and potentially lose the losses once it no longer qualifies and you can't make any elections to keep it in.

If it becomes an FHL again in the future though, you will then be able to use the losses, as well as the non-FHL losses b/f, I think, under HMRC's odd interpretation.

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