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Furnished holiday lettings – the final furlong

14th Dec 2009
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Despite concerted lobbying from the UK tourist sector, PBR 09 confirms the abolition of all tax benefits applying to the Furnished Holiday letting (FHL) sector, which has operated as a deemed trade until now. As a consequence of this, a number of tax benefits will be withdrawn from April 2010, and two technical documents set out the effect of the changes in some detail, including the draft legislation.

The technical note which provides guidance on the change summarises the changes and their impact under the following headings :

  • Computation of business profits : as the profits of a property business and those of a conventional trade are calculated on the same broad basis there is no particular impact on the computation of business profits, with the exception of capital allowances (see below).
  • Capital allowances : Capital allowances are not available in respect of plant and machinery in a dwelling house which is let. So the move to classifying FHL activities as normal lettings will mean that capital allowances cannot be claimed in respect of expenditure incurred on or after 6 April 2010 (1 April for companies). However, the guidance document states that capital allowances will be available on the remaining expenditure in the pool for businesses which have commenced prior to the date of change. No additional expenditure will of course be added to the pool of expenditure. Para 13 of the Schedule in the draft legislation confirms this point.
  • Wear and tear allowance : FHL operations are excluded from claiming the 10% wear and tear allowance, but will be permitted to claim in future. The document clearly states that this will be in addition to any residual capital allowances available under the transitional rules described above
  • Landlords Energy Saving Allowance : There is a tax allowance of £1,500 per property in respect of certain energy saving expenditure (such as insulation) which will now be available on FHL properties.
  • Losses : Unused losses for income tax which are carried forward from 2009/10 will be treated as property business losses incurred in that year and will be available to set off against other property business profits in 2010/11 and subsequent years. The treatment will be similar for corporation tax.
  • CGT entrepreneurs’ relief (ER) : The business will cease to be a trading activity after 5 April 2010 and the business will deemed to have ceased for the purposes of Entrepreneurs’ relief, even though the business may continue as an ordinary property business. This means that any disposal of assets in the three years following will be treated as the disposal of assets of a business which has ceased, and Entrepreneurs’ relief will be available in respect of the disposal, provided any other relevant conditions are met. In particular, the FHL business would have to have commenced before 6 April 2009 in order to meet the criteria of one year in business. It is unlikely that disposals of shares in companies carrying on FHL activities will benefit from ER if disposed of after 5 April 2010. Relief may also be available on associated disposals in relation to actual cessations before or deemed cessations on 6 April 2010, provided the relevant conditions are met.
  • CGT rollover relief : Rollover relief will no longer be available on the reinvested gains arising on FHL assets disposed of after 5 April 2010, unless the disposer carries on another separate trade in which case the rollover will be restricted to recognise the non trade use of the asset between 6 April 2010 and the date of disposal. Generally speaking, gains rolled into FHL assets are not affected, but of course these gains cannot be further rolled over on subsequent disposal. Where a gain has been held over into an FHL depreciating asset this gain will crystallise in the normal way – the change will not trigger an earlier charge to tax.
  • CGT holdover (gifts relief) : There will be no relief for FHL assets gifted after the date of change, but assets which have been obtained subject to a hold over election will not be affected. Any latent gain will be taxed on eventual disposal as normal.
  • Relief for loans to traders : Loans made before 6 April 2010 which have qualified for relief under the loans to traders provisions will not be affected by the change, and will continue to be a qualifying loan. No loans made after the date of change will qualify.
  • Substantial shareholding exemption (SSE) : The relief available to exempt the gain on the disposal of a substantial shareholding in a trading company will terminate on 31 March 2010, but there is a transitional rule which will allow certain disposals to attract the exemption if sold within 2 years of the date of change.

Trading or not?

The guidance document also includes HMRC’s view on whether an FHL business might “convert” to a trading business by the provision of additional services. It is HMRC’s view that the provision of additional services would amount to a separate trade, and that any charges for the use of the property should be separated from other charges, such as the provision of cleaning and fresh laundry or the provision of meals to form property income on the one hand and a small trading activity on the other. Charging separately would be an indication that there is a separate trade. It will be interesting to see whether this view is challenged through the courts.

Planning points

The obvious planning points emerging are in relation to capital allowances and Relief for Entrepreneurs. In relation to capital allowances, any business intending to continue in the FHL activity would be wise to spend as much as they can now afford replacing items of furniture and white goods for the property. In addition to being permitted to claim AIA of £50,000 in the current period, plus 40% FYA on the balance, it is now clear that the residual expenditure in the pool will provide a trickle of allowances for the forseeable future, as allowances on the existing pool will continue. If owners are considering selling up this presents a challenge, as they may incur a substantial balancing charge on disposal if they have claimed allowances on expenditure in the last year or so. Note that wear and tear allowance will be available in addition to capital allowances!

As far as planning for ER is concerned, it was originally suspected that owners would have to sell by 5 April 2010 to secure ER, but the deemed cessation rule permits the subsequent sale of the assets within a three year period after the change which will qualify for ER under the "cessation of business" rules. This will apply to both individual property owners and partnerships, and seems to apply irrespective of whether the FHL activity continues for a while after April 2010, as the cessation is "deemed" by the change in the rules. This means that owners do not have to decide now what to do as they effectively have a further 3 years to decide whether to sell up or not. However, possible changes in the rate of CGT and any effect that might have on ER should be added as a caveat.

Replies (5)

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By Ralphq41
14th Dec 2009 11:58

FHL company

You state that FHL companies will not qualify for ER after 5 April 2010.

Do they not have use of the '3 year period'?  If not does anyone have thoughts on planning for such companies?  Should the property be sold and business be ceased pre 5 April. and then wound up thereafter (within 3 years) .....would that work?

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Rebecca Benneyworth profile image
By Rebecca Benneyworth
15th Dec 2009 14:36

FHL companies

They will have ceased carrying on a trade as at 5 April 2010, but in a company they will have continued to carry on an activity which is not a trading activity so at the point of sale they would be a non qualifying company. If you cease activities completely on 5 April 2010 then you would have the three year rule to dispose of the company - sell the properties, pay CGT in the company and then distribute the proceeds as capital and claim ER. But I suspect that the CG in the company would be unattractive. Unless you can sell the shares with the properties unlet  - not convinced this would work anyway.

Does anyone else have a view? I'm pretty sure I'm right.

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By dennywren1
17th Dec 2009 11:21



 You have not mentioned any thing on IHT business asset relief which I assume will disappear at 5th April 2010. If the property can be transferred into a non settlor interested trust and BPR claimed, I sssume the gain would be held over as it is a chargeable transfer.  This would remove  the property from the Doners estate and providing the value of the property remained inside the nil rate band no 10 year or exit charges would apply.  The income will still attract 40%  tax rate but this may happen anyway, in addition all future income will remain outside the doners estate and passed to beneficiaries who do not pay higher rates. Is this too good to be true?    

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By Galaxian
21st Dec 2009 07:42

FHL Companies


The HMRC technical says:

"The company ceased to be a trading company (or the holding company of a trading group) before 6 April 2010, including cases where the ending of that status results from the deemed cessation of the company’s (or group’s) FHL business on 5 April 2010, in which case disposals of shares in the company made within three years from that cessation will remain eligible for entrepreneurs’ relief if the other qualifying conditions are met."


In response to dennywren1, the FHL rules have never applied to BPR, so the business would have to qualify as an actual trade rather than a deemed one; if HMRC are correct in that the provision of services are treated as a separate trade, as distinct from a property letting (investment) business, would they allow BPR on the FHL in the event that the services element exceeds 50% of the total level of activities (i.e. the business overall is not one of wholly or mainly the holding of investments)? Will preparing a combined set of accounts demonstrating two elements of one business help? Given that both 'businesses' use the property, I am not sure how you would apply BPR if the services business is considered separate.


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17th Feb 2010 11:10

FHL - the final furlong - CGT Rollover relief

With regard to the article and the para on the subject above, the penultimate sentence reads:

'Generally speaking, gains rolled into FHL assets are not affected, but of course  these gains cannot be further rolled into over on subsequent disposal.'

Does this mean a a gain can be rolled into a FHL purchased after 5 April 2010?



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