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Furnished Holiday Lettings consultation: our response

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25th Oct 2010
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AcountingWEB.co.uk Tax Editor Rebecca Benneyworth has compiled the community’s feedback on the FHL rules consultation paper and submitted them to HMRC. Here is an outline of what she said.

We ran two technical articles on the proposed new Furnished Holiday Lettings regime during the summer, which attracted nearly 11,000 hits and 36 comments.

Members were generally supportive of the proposal to increase the required period for which properties are available for letting as holiday accommodation. However most of those who expressed a view were concerned that the extension of the actual let condition was likely to mean that many operators in the UK (including those with a commercial multi-property set up) would not be able to meet the conditions.

Members considered that curtailing loss relief was essential where the FHL was essentially a holiday home for the owner with letting as a sideline. However, operators in the UK expressed concern about the restriction of loss relief; the proposals are more restrictive than currently apply to a normal letting activity, which does seem to be unfair.

While the changes to the capital allowances rules were understood and regarded as a sensible solution to the current problems, they could give rise to significant additional complexity.

Allowing businesses to make a case for trading status on an ad hoc basis is not sufficient and will once again cause uncertainty.

One member’s comment provided an apt summary of the concerns expressed by several members: “We have 4 eco friendly holiday lodges which we have available for letting 52 weeks/year. Our intention has always been  and is still for it to be a commercial business with a view to profit. We are still making losses five years into trading. The occupancy is growing year on year and there is a substantial amount of repeat business. The occupancy is running at just less than 50% (26w). In all our planning, marketing research and local statistics indicated that occupancy should be 32w. We are not there yet and so have had to subsidise the business.  In addition we both have full time (although not very well paid jobs) and run the FHL business around these and at the weekends.

“My concerns for the future are not how long the properties are available for letting (as that is the business) but how long they are actually let which is so dependant on the state of the economy, market,weather etc we are in a rural location and had minimal occupancy between Dec 09 and May 10 despite having central heating etc.

“My other concern would be the treatment of losses I have been able to use these against my other income.

“Within four years we expect to be in profit and hope to be able to offer employment for others and even expand providing jobs and facilities in the rural area. We will struggle if we are unable to offset these losses against our other income. Losses can arise at any time so I think the losses should always be available for offset against other income.”

The full consultation response quotes extensively from the points raised by members on the following topics:

  • The increased available/lettings time periods
  • The amended loss relief provisions
  • The capital allowances proposals

Operators need certainty about the tax regime that applies to them, as this will affect decisions to invest both in the business as a whole, and in repairs and capital items from year to year. The current proposals do not offer that certainty and as such present huge problems to the industry as a whole (apart from those investors who are essentially buying a second home and making a small income on the side from it).

Our proposal is that the changes should be reconsidered, and that a regime which grants full trading status to operators running a genuine business; remaining holiday lets might then either fall into normal letting rules, or alternatively might qualify for a “new FHL” treatment with the proposed restriction of loss relief.

This route might satisfy the need to reduce the tax cost of the regime, while causing the least damage to rural economies and the tourism industry.

In summary, the artificial designation of a “deemed trade” could be dropped and moved to a “full trade” versus “ordinary letting” classification.

Where a furnished holiday letting business meets the required conditions – which would need slight amendment – it is classified as trading with all that comes with that. The downside for operators is that they should also pay Class 4 NIC on their profits as they benefit from trading treatment. This is particularly important in view of the planned restrictions on the offset of losses in the future, and the fact that my suggestion would give operators unrestricted loss reliefs (as they have now). The additional revenue from Class 4 would offset the additional cost of trade reliefs and for the operators they now have cast iron access to both CGT and IHT business asset treatment.

This proposal was put forward in our article Furnished Holiday Lettings: your views needed and was well received by members. We will now have to wait and see whether HMRC and the Treasury take the same view.

Download our full consultation response (68kb PDF) to see the full details – or refer to our previous
Furnished Holiday Lettings coverage.

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