Finance Bill 2011: Changes to the furnished holiday letting regime
Tax editor Rebecca Benneyworth offers a technical summary of the changes to furnished holiday lettting rules outlined in this week's draft Finance Bill 2011.
AccountingWEB.co.uk was one of the 229 respondents to the consultation on the new furnished holiday letting accommodation rules. The documents published on 9 December include a summary of the consultation responses and draft legislation for the Finance Bill 2011.
It would seem that the balance of the responses were fairly spread across the various areas government was consulting on – there was no large majority of views one way or another, so in summary most of the proposals will be carried forward. In summary these were originally set out as follows:
The proposals seek to tighten up the conditions under which the favourable tax regime can apply, and to modify the rules on loss relief.
- 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.
- To have notional pools of expenditure for capital allowance purposes, so that when a property does not qualify, no allowances are claimed, but the tax written down value remains available for future years.
The main thrust of the comments we received on AccountingWEB suggested more radical reform was needed, and although the government welcomed those comments, and will retain them for future consideration, the urgency of reform was the reason given for not being more radical than the changes set out above. This is very disappointing as the opportunity to reform this area of tax is unlikely to present itself again soon – this was a one off chance to get it right.
However, some concerns, and particularly those regarding the period for which properties are actually let, were taken on board, so here is a summary of the final version of the rules:
- The increased availability and occupancy conditions will only apply from April 2012 rather than April 2011, allowing operators more time to advertise their properties to seek extra bookings, or to negotiate availability with any parties placing restrictions on them. It is likely that local councils are the parties placing restrictions on the letting of holiday accommodation as part of planning restrictions, and it is therefore questionable whether any amount of negotiating would make a difference here. Members’ views would be interesting to hear.
- The availability and occupancy rules will be applied to all properties owned by a business on an average basis, and not on a property by property basis. So there is no chance that a business will have some properties which qualify and some which do not – reducing the administrative burden quite significantly. This will have a feed into additional simplification for the capital allowances position too.
- The treatment of losses is one area where the government is unconvinced of any need for change to the proposals, and the change to loss relief will be implemented from April 2011. In answer to the criticism that FHL operators have worse provisions for loss relief than ordinary property letting activities, the answer given was that the measures need to be viewed as a package, and the benefit of capital allowances and the CGT benefits should be considered alongside the loss relief rules. This does seem to accept that the loss rules may appear unfair but all suggestions for any improvement were pushed back. In view of the decision not to attempt much more radical reform, this was to be expected.
- Where businesses fall in and out of the qualifying conditions from year to year, the government did accept that this would cause uncertainty and may even stifle investment in the sector. In view of this, the proposals have been modified to allow businesses which meet the qualifying criteria in one year to elect to be treated as if they met the criteria in the following two years, provided certain other criteria (as yet unpublished) are met. This will allow businesses which have a number of properties under refurbishment to continue to qualify, and will give more certainty as businesses will know at the start of a year whether they will qualify for that year or not – this will enable them to make investment decisions based on anticipated tax outcomes. This is a most welcome change.
- The proposals for notional pools of capital allowances will not be proceeded with, so businesses which fail to qualify will need to carry out a deemed disposal at valuation; a further valuation would then be needed if the businesses once again fall into the regime. However, the likelihood of this being a frequent event is now quite low, as the averaging and two year carry over rules should minimise this.
- There will be no changes to the CGT rules affecting furnished holiday letting properties.
Rebecca Benneyworth will be attending a meeting with HMRC on Monday 13 December to discuss the final proposals in some depth; she will report back on Monday.
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Rebecca trained in London with Kidsons and, on qualifying, spent some time as Chief Accountant of a manufacturing company. She now has her own small practice in Gloucestershire that comprises of owner managed businesses and small companies.
She also lectures extensively for a range of professional bodies, accountancy firms,...