Partner Rebecca Benneyworth Training Consultants
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Furnished holiday lettings changes explained

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9th Sep 2011
Partner Rebecca Benneyworth Training Consultants
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The legislation to amend the Furnished Holiday Letting (FHL) legislation is introduced by section 52 and Schedule 14 of FA 2011. As the rules finally reach the statute book, Rebecca Benneyworth offers a summary of advantages and traps that will come into play from April 2012.

The outline characteristics of the Furnished Holiday Letting (FHL) rule reforms to bring the UK in line with European law have not changed through the tortuous formulation process that has taken more than two years. Some aspects of the favourable tax regime applying to FHL activities are retained, but new more restrictive conditions and amended loss relief provisions make the regime considerably less generous. Here is an overview of themain changes that are now in place.

Extension to EEA activities

Schedule 14 extends the favourable tax regime applying to FHL activities to properties in the European Economic Area (EEA). This treatment has been in place for some time, but has been non-statutory until now. Part 4 of Schedule 14 makes the amendments to CGT to allow EEA FHL activities to benefit from the CGT reliefs available to UK FHL operations.

There are provisions to require the segregation of overseas FHL operations from other overseas property activities for both capital allowances purposes and for the purposes of loss relief (see below). EEA FHL activities are also quite separate from the operation of a UK FHL activity for all purposes.

Amendments to ITA allow all EEA FHL activities to be treated as a separate single deemed trade, rather than segregating by reference to the various locations in which properties are operated. The profits of the EEA FHL activity are deemed to be relevant UK earnings for pension purposes (new section 328B inserted into ITTOIA 2005 by Sch 14 para 2(8)).

This means that there are four heads of charge to property income :

  • Conventional property income
    • UK
    • Abroad
  • Furnished holiday lettings
    • UK
    • EEA

Qualifying periods

The periods for which a property must be available for letting and actually let increase with effect from April 2012 as follows:

  • The property must be available for letting for 210 days in a tax year (up from 140 days)
  • The property must be actually let for 105 days (up from 70 days).

However, the letting test must be applied separately to UK and EEA accommodation – these two sources are separate for all purposes.

The ability to average across properties owned by the operator to meet the qualifying periods remains in force, but there is no averaging between UK and EEA properties. The taxpayer can elect which properties are included in the averaging election and which are not.

Period of grace

New section 326A of ITTOIA 2005 and similar new section 268A of CTA 2009 for companies introduce the period of grace in relation to properties which do not meet the letting condition. Where a property fails to qualify only by virtue of the number of days actually let, a person can elect that the property is to be treated as meeting that condition in the two years following a year in which the condition was actually met. An election is necessary in the first of those years in order to be available in the second. The property must have qualified in one year (the base year) which is 2010/11 or a later year (by virtue of Sch 14 para 6) which means that qualifying under the lower limits in 2011/12 gives access to two years period of grace when the new higher limits come in. This provides a bridge to the new regime, particularly when an operator may be planning to cease and sell up – he would still be entitled to Entrepreneurs’ relief for a period of time.

Where this election is sought, it is not possible to make it when the property is already the subject of an averaging election for that year, so you will need to be very careful to monitor elections and dates to ensure that you don’t compromise your client’s position.

Note that there is no period of grace in respect of the period of availability. If this is breached, the property will fail to qualify in the period.

Loss relief

The change to loss relief for FHL losses applies from April 2011. In income tax it is achieved by simply excluding ITA 2007 Ss 64 – 82 and 89 – 95 from applying to FHL activities. This excludes all of the trading loss relief provisions apart from carry forward against future profits of the same trade (s 83 et seq). So losses incurred on FHL activities can, from 2011/12 only be set against future profits of the same trade, treating EEA and UK activities as separate businesses. There are no sideways relief provisions, nor is there terminal loss relief on cessation of the business.

Capital allowances

From April 2011 where a property ceases to qualify as an FHL in a period, but it still let, and therefore falls to be treated as a normal letting, the capital allowances rules have been modified to provide that there is a deemed disposal and acquisition at market value of assets in the pool, so that a balancing allowance or charge is taxed on the operator. The market value is capped at the original cost of the assets for this purpose.

Obviously when a property starts to qualify once more as FHL, the operator may wish to treat those assets as reacquired by the FHL business as the availability of capital allowances is more favourable. The operator will therefore probably seek to treat the assets as once again acquired at market value.

Where an operator has a multi property site this may entail some detailed record keeping to allow the adjustments to be made where necessary.

Replies (17)

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By ireallyshouldknowthisbut
12th Sep 2011 11:19

Am I correct that the VAT threshold is still based on the old definition?

That is to say you can have a FHL for VAT but not for income tax?

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By Bahram
12th Sep 2011 11:41

Furnished lettings

Hi Rebecca

Thanks for this article . I am still no wiser as to this  question : 

on which furnished lettings you can claim 10% wear and tear allowance and on which you can't. Can you explain easily please ? 

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Replying to justsotax:
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By david5541
15th Sep 2011 14:11

10% wear & tear-Furnished lettings

[quote=Bahram]

Hi Rebecca

Thanks for this article . I am still no wiser as to this  question : 

on which furnished lettings you can claim 10% wear and tear allowance and on which you can't. Can you explain easily please ? 

10 % wear and tear allowance is supposed to only be claimed of FURNSIHED RESIDENTIAL LETTINGS 

IT IS NOT AVAILABLE ON OTHER LETTINGS

FURNISHED HOLIDAY LETTINGS QUALIFY FOR ORDINARY capital allowances

 

capital allowances(because of the renewals basis) are not generally available on other let property falling outside the description of "holiday" "furnished" and "residential".

 

I hope this helps

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By robert baker
12th Sep 2011 14:46

FHL

Can FHL losses be set against other property income in the same year or do they have to be carried forward to the following year and use against future FHL profits

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Replying to justsotax:
Me
By Mark Purdue
13th Sep 2011 11:01

FHL Losses

@Robert Baker

My understanding is that FHL losses can only be carried forward against future profits from the same 'business'.  So "UK FHL" losses are only available against future "UK FHL" profits, and "EEA FHL" losses can only be carried forward against "EEA FHL" profits.

The only exception to this (I think) is the provision in ITA 2007 s120, which allow a property loss which arises due to a capital allowance claim to be set against general income.  Previously, these were only ever claimed for non-FHL properties (in the odd occasions CAs could be claimed), as the FHl loss provisions were more beneficial.  However, now that all other FHL loss reliefs have been repealled, I can't see anything to suggest that s120 does not apply to FHL type properties.

Perhaps Rebecca can clarify?

Thanks

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Replying to Flying Scotsman:
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By jonesrichardm
13th Sep 2011 11:22

FHL losses

In answer to MarkP's question, the UK or EEA FHL business is treated as a trade under s127/s127ZA, the profits of which are carved out of the person's results from property businesses. As such, I do not think that the facility to utilise property losses under s120 is available in relation to FHL businesses because the loss is deemed to have arisen from a trading source and not a property business source.

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Replying to justsotax:
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By jonesrichardm
13th Sep 2011 11:14

FHL losses

A UK furnished holiday lettings business (and now an EEA furnished holiday lettings business) is treated as a seperate trade for tax purposes. Previously, this allowed losses from the business to be used in the same way as any other trade i.e. they could be off-set in the current year against other taxable income or carried back for a year (or more in certain early years or terminal loss scenarios). However, with effect from 2011/12 (or accounting periods beginning on or after 1 April 2011 for companies) all the various loss relief mechanisms available are removed so that the only way to use an FHL loss will be to carry it forward against profits made from the same FHL business (i.e. UK and other-EEA FHL losses will need to be streamed separately).

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Replying to justsotax:
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By david5541
15th Sep 2011 14:14

fhl current year losses

robert baker wrote:

Can FHL losses be set against other property income in the same year or do they have to be carried forward to the following year and use against future FHL profits

FHL losses can be offset against all other income in the same year including property income.

 

they can only be carried forward to relieve against fhl profits from the same source.-just like any trade.

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Replying to justsotax:
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By david5541
15th Sep 2011 14:20

fhl losses sideways relief abolishhed

not available in 2011/12

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By Keels
13th Sep 2011 09:01

Am I right in assuming that the period of grace only really affects the CGT position? FHL losses still cannot be offset against other income from 2011/12? 

Thanks

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Me
By Mark Purdue
13th Sep 2011 11:40

CA Losses

@jonesrichardm

 

Thanks, I will have a look.

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By robin.drinkwater
15th Sep 2011 16:52

Option to choose to be treated as FHL or not

Is a property automatically treated as FHL if it passes the qualifying tests or is it the choice of the owner if it is treated as FHL or as normal property income even if it does meet the FHL requirements?

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Replying to runningmate:
By plummy1
23rd Oct 2011 01:37

Capital Allowances Claims

 

In nearly all cases it is beneficial to treat it as an FHL for tax purposes.

 

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By StevieG
16th Sep 2011 14:46

holiday lettings

Will the changes help in preventing assessment for class 2 nat insurance on holiday lettings income?

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By Jennifer
08th Feb 2012 11:42

Losses on FHL

Hi

Am I right in assuming that losses for FHL (acquired and let prior to the change in rules) can only be off-set against the same income in trade and not any other source of income (with the exception that losses arrive out of capital allowances claims).

Also if a person has say three furnished holiday lets trading under the same name, but owned under separate deeds and makes a profit on one letting and a loss on the other. Can the loss be off-set against this profit?

Many thanks

Jennifer

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Kevin Wallis
By KWallis
26th Feb 2013 14:49

Losses made during the ownership of a FHL and CGT on selling

Hi

Would you be able to offset carried forward losses on the previous years' FHL letting against the the CGT due on the sale of the asset?

 

cheers Kev

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By hunter_linda
12th Nov 2013 14:35

New FHL & Capital Allowances

Hi there,

I have a client who purchased a FHL at end of 2011. He carried out a number of rennovations (new bathroom, kitchen, white goods etc). He started letting it from beg of July 2012 which means that he can claim capital allowances on the new fixtures and fittings from July 2012. However, when I have applied the new FHL tests for his first 12 months of letting he has not met the 105 days letting condition. This means it cannot be classes as a FHL for tax year 2012/13 and therefore he cannot claim the CA's. Can someone please tell me if I can claim the allowances in future years and if there is a time limit. Say for example from tax year 2013/14 the letting condition is met and the property becomes a FHL can I then claim the CA's for 2012/13 and 2013/14 on his 2013/14 tax return. My intention is to create a CA pool and apply the WDA of 18% from July 2012. Thanks.

 

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