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Shock repeal of the Furnished Holiday letting rules

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22nd Apr 2009
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The beneficial tax treatment afforded to Furnished Holiday lettings (FHL) in the UK extends to favourable treatment of losses – permitting them to be set against other income in the same way as trading losses – and capital gains tax, meaning that FHL properties are treated as trading rather than investment properties, attracting Entrepreneurs’ Relief, hold over relief and other business CGT reliefs. FHL profits also count as pensionable income. Owners can also claim capital allowances on equipment and furniture, which is not possible in respect of investment properties.

It is now apparent that the restriction of this beneficial treatment to properties in the UK rather than the European Economic Area is likely to be contrary to European law. HMRC now accept this point, but as a result will be repealing the Furnished Holiday Letting rules (including those applying in the UK) with effect from April 2010. This is no surprise, otherwise the tax authority would be flooded with claims on foreign holiday homes which meet the FHL rules (which are, admittedly quite restrictive).

In the meantime, advisers will need to check whether any clients have foreign property - within the EEA - which is let which can be retrospectively brought within the FHL rules, rather than treated as pure investment properties. Claims which apply to tax years for which the income tax return amendment window remains open can be filed as an amendment to a return. Other claims may be made as stand alone claims – more details of the relevant time limits and arrangements for late claims are in the technical note released on Budget Day.

Replies (26)

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By User deleted
28th May 2009 15:39

What about the impact of rollover relief
It appears from the technical note that rollover relief has been extended to qualifying EEA properties.

Are we to take it that previously rolled over gains will not come into charge when the FHL legilsation is repealed?

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By gbreskal
26th May 2009 17:50

Late claim for losses set off vs other income
What about the provision for late claims where the taxpayer was effectively prevented from making a timeous claim for reasons beyond his/ her control.

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By mikewhit
11th May 2009 18:55

Investment
@Confused:
You are forgetting that many of these FHLs were also investments, hence making an annual loss or breaking even just meant that the mortgage and service costs were covered, with no reference to asset value.

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By markfaherty
01st May 2009 13:32

Reply to John Hayton
See my comment to Mark below.

There is no specific statutory right for BPR to apply to FHL's and most guidance is derived from case law and HMRC's IHT manual at IHTM25278; http://www.hmrc.gov.uk/manuals/ihtmanual/IHTM25278.htm, although this is not particularly helpful.

The key rests with the level of services provided to the holidaymakers by the property owner/agent during their stay. This does not just mean calling in every day to check all is well and a quick dust around or a mow of the grass. A good example could be a fishing cottage where the owner takes the guests on pre-arranged fishing trips in his boat or similar properties with owner/agent arranged activities such as hunting, climbing lessons, scuba diving, skiing etc.

In any case if the business was one to which BPR would have been appropriate before 5 April 2010 this will cease after that date.

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By markfaherty
01st May 2009 13:12

Reply to Graeme
I apologise for my misleading opening line; I agree that there has not yet been a change in legislation and, if you read the Finance Bill and the Treasury Notes accompanying it, one is not proposed. There will therefore be no statutory right to the extension of FHL rules to EEA properties nor is there any precedent set in case law. I would therefore expect that these one year only rules will be treated as a concession only and therefore no error or mistake is appropriate. The European Court has not made any ruling and I expect that the repeal from next April is a trade-off of sorts.

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By johnnywow
01st May 2009 07:51

BPR on Furnished Holiday Lettings
Unless I have missed something, I think the Technical Note is silent with regard to Business Property Relief (for IHT) on Furnished Holiday Lettings. Am I right ?

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By GRL
30th Apr 2009 17:32

Redemption?
Mark Faherty has said:

"... It is rare for tax legislation to be retrospective. The application of FHL to EEA countries is for this year only - 2009/10 with the granting of reliefs which are within their usual time limits. Loss relief vs total income and entrepreneurs relief are therefore only available for 2006/07 (if made by 31 July 2009 (ex-gratia extension), 2007/08 by repair and 2008/09 when preparing the return ...".

I agree that this is what HMRC have explained in their Technical Note of 22 April 2009. However, I wonder if this is the end of the story. There has not yet, in fact, been any change of tax legislation. All that has occurred so far is that HMRC have now acknowledged that the drafting of their exisitng legislation "may not be compliant with European Law", and that they are therefore now prepared to allow it to be interpreted differently, for all years in respect of which amended SATR's can be lodged.

However, the solution which HMRC have proposed appears to create something of an inequity: take, for example, one of my clients, who had large losses from a Spanish property in 2005/06 (which would have qualified as an FHL if it had been situated in the UK). Is it not the case that the 'late' realisation of the incorrect drafting has prevented those losses being offset against 2005/06 other income?

In this connection, Extra Statutory Concession B41 concerns Claims to Repayments of Tax, and states that: "... repayments of tax will be made in respect of claims made outside the statutory time limit where an over-payment of tax has arisen because of an error by the Inland Revenue or another Government Department, and where there is no dispute or doubt as to the facts ..."

Is it possible that this ESC could be used to justify the lodging of a late claim to a repayment? Furthermore, is there any scope to increase the extent of the late claim to repayment by enhancing the losses to be claimed by capital allowances - and if so, is an error or mistake relief claim the basis on which to do it?

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By markfaherty
29th Apr 2009 15:44

Reply to Cheets
As far as we have been advised that is the case - from 6 April 2010 FHL's are no longer business assets and therefore 18% CGT - but see my post below re the three year rule; some transitional provisions may be put in place but don't hold your breath!

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By User deleted
29th Apr 2009 15:35

CGT on FHLs
Thanks for clarifying the VAT position Mark. Am I right in presuming the CGT on the sale of FHLs after 2010 should be 18%?

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By markfaherty
29th Apr 2009 15:11

Reply to Carole
It is rare for tax legislation to be retrospective. The application of FHL to EEA countries is for this year only - 2009/10 with the granting of reliefs which are within their usual time limits. Loss relief vs total income and entrepreneurs relief are therefore only available for 2006/07 (if made by 31 July 2009 (ex-gratia extension)), 2007/08 by repair and 2008/09 when preparing the return; see my reply to Nick.

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By markfaherty
29th Apr 2009 14:50

Reply to Mark
I think it safe to assume that BPR will not apply from 6/4/2010 to those FHL properties which may have qualified for this relief. This is, however, very rare and to qualify the taxpayer must provide more than just the accommodation. The Revenue's manuals indicate that for this to apply the rental period must be very short term and the owner, or his agent, must be substantially involved with the activities of the holidaymakers both on and off the premises. In cases like this, depending on the facts, it may be argued that a bona-fide trade exists and therefore the FHL rules are irrelevant.

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By markfaherty
29th Apr 2009 14:41

Answer to Cheets
There has been no change to the VAT rules on Holiday Accommodation, it remains standard rated. It is only the favourable direct tax treatment that will be repealed from next year. There is often no correlation between VAT and direct taxes

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By markfaherty
29th Apr 2009 14:26

CGT on disposal
There has yet been no mention of whether the 3 year grace period will apply as it currently does for the sale of former FHL's after cessation of trading. It would be logical for the deemed cessation date to be 5 April 2010 and therefore if a property is sold within the following three years it would still benefit from entrepreneurial relief for CGT; the devil will be in the detail no doubt.

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By markfaherty
29th Apr 2009 14:21

Reply to Nick Jarvis
No Nick - the loss relief claim must be within the prescribed time limit, i.e. made within 12 months of the fixed filing date for the tax return for the year concerned. A claim can therefore be made for 2007/08 as the filing date was 31 January 2009. Other years are now time-barred with the exception of an extension for claims for 2006/07 to 31 July 2009. Any unused losses from earlier years can now be claimed against the UK property business. For full details read the Revenue's technical note available from the website at http://www.hmrc.gov.uk/budget2009/furnished-hol-lets-1015.htm.

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By User deleted
29th Apr 2009 13:07

FHL Question
I have a reasonable size holiday let business with a turnover of £200K+. I am VAT registered, as you would expect a business of this size to be. If the revenue (from APR 2010) does not recognise FH Lets as a trade then will I still have to pay VAT? I believe that turnover letting of residential property is not subject to VAT therefore do my properties fall into the same category from 2010?

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By User deleted
29th Apr 2009 12:14

time limits
HMRC published this further guidance on FHLs here:

http://www.hmrc.gov.uk/budget2009/furnished-hol-lets-1015.pdf

They are accepting late claims for years back to 06/07 if they are made before 31 July 2009.

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By User deleted
29th Apr 2009 12:11

Am I missing something?
There are a number of posts complainging about the withdrawal of a relief for losses, but what's the point of running a business (any business) at a loss just to save tax? Seems a waste of time to me.

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By User deleted
29th Apr 2009 10:35

Loss claims
Does this mean that loss claims against other income can be made going back 6 tax years for properties in the EEA which no qualify as FHLs?

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By User deleted
28th Apr 2009 13:05

Late claims & amendments ????
The technical note from HMRC dated 22/4/09 states that 'The normal rules for late claims will apply to all other late claims and amendments' - does this mean that we could submit late amendments and loss claims for earlier years that are now out of date on the basis that an in-date claim was not submitted for reasons beyond the control of the claimant or the agent (BIM75230) ?

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By User deleted
27th Apr 2009 14:54

VAT
Where does this leave the VAT status of the income? Presumably if it is not a "trade" then the income will not constitute a taxable supply?

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By mikewhit
23rd Apr 2009 15:04

Another route
Perhaps it would make sense, as someone suggested recently on another AW item, to create a separate management company to service the FHL(s) - that would be one way of offsetting losses in the running costs ?

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Nigel Harris
By Nigel Harris
23rd Apr 2009 13:54

Bad news all round
The foreign property extension is a bit of a bonus, but this hits the whole of the UK holiday letting industry. All of my clients with holiday lets rely on the relief for losses against other income to make the enterprise worthwhile. The UK holiday season is very short, so you have a job to make it pay. OK, so many of them will make a profit this year due to the very low mortgage rates and - perhaps - the increase in people holidaying in the UK because of exchange rates, etc. But long term this will discourage people from buying holiday property.

Will there be a flood of holiday property onto the market this year so owners can crystallise a 10% CGT liability? Not unless the property market picks up I imagine. But it might be worth looking at ways to crystallise a gain in 09/10 (family sales/gifts, or transfer to your own company maybe) unless the Gov comes up with a raft of anti-avoidance rules of course.

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By User deleted
23rd Apr 2009 11:58

Quick thoughts
@Mark - I think that HMRC's current view is that most FHL properties probably don't qualify for BPR at the moment (let alone post April 2010). There are no specific rules in the IHTA defining FHL. For a FHL to qualify as a business for IHT you would need to be providing significant services over and above provision of the property

@Neville Ford - I don't think a close company that invests in investment property is a CIHC (see S13A(2)(b)). In any case, rental losses for a company (previously Schedule A) can be set against other profits of the year, including trading profits (previously Schedule D Case I)

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By Neville Ford
23rd Apr 2009 09:08

Furnished Holiday Lettings & CIHC
I have a client that is in his early 60s. He has a Ltd Co that has traded for a number of years and due to my client's relatively modest lifestyle has built up quite a cash reserve. Over the last couple of years we have been looking for a suitable opportunity to use that cash to invest in trading assets (to avoid being classed as a CIHC) that would generate an acceptable return for my client but with less input than he currently puts in and to allow him to partially retire.

With the fall in property prices he has been looking at furnished holiday lettings as a possible option as until now it constituted a trade, any trading profit and any profit on sale of the properties in a few years time would be subject to CT at the small companies rate. He would also have been able to offset any losses incurred against other trading profits of the company. Also under current legislation when he sold the properties and liquidated the company the proceeds would be a capital distribution taxable at 18%.

I am to understand that with effect from 6 April 2010:
Any FHL losses will not be able to be offset against other trading profits, and
as it no longer qualifies as a trade it will be classed as investment activity for CIHC purposes?

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By User deleted
23rd Apr 2009 09:04

IHT?
Is it fair to assume that any FHL 'letting business' that would have previously qualified for BPR... won't from April 2010?

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By EQUILIA
05th Aug 2009 19:18

Humpty Dumpty, “when I use a word … it means just what I choose
Rule No. 1 Beware of Dave Hartnett bearing gifts, clarity or modernisation/simplification.

Rule No. 2 Do not believe everthing that the Revenue Media writes in guidance; it might be what they would like it to be. Or it might write one thing and mean another.

Rule No 3 When Dave says he wants to work with you; it means if you do not; you have a problem which he can solve.

Minister “We expect people to be sensible. The tax system cannot be absolute and is not designed to be.
The Schedule gives clear indicators of the type of development we want”.

In other words, “The law doesn’t matter; people should guess what the government wants them to do and do it, irrespective of whether or not the laws that we choose to enact require them to do”.

I doubt that even Lewis Carroll would have had the nerve to put forward such an outlandish proposition.

What a star you are "ROBERT MAAS".

As Dave says, or was it Alias Jones.

If we believe a matter is "shall we say" is controversial; we will consult widely and allow a long period of consultation; so all, can have their say.

We will listen; and as in "My Fair Lady" - "She willl ask for your advice and then "go out and do precisely what she likes"; [or what out Dear Leader Dave H., desires].

What a termially dishonest Government we have. Having broken the back of the economy with spend, spend. spending policies, they have almost broke the BoE (bigger than the Bank of Monte Carlo) with Quantitive Easing. It pales into insignificance when compared with the unfunded cost of Platignum Plated Public Sector Pension which is £1.2 trillions. No wonder those that live in the State Sector say "I'm alright Jack and it is inflation linked".

Evidence:

Why no consultation on Equitable Liabiliy withdrawal (Dictat)?
Why no consultation on furnished holiday lettings?
Why no adequate consultation on appeal time limits?
Why change Section 32 TMA 1970 without consultation?
Why pretend that - in Wilkinson justifies withdrawing ESC's ? I believe no such inferance from the Ratio Decidendi. I am sure Lord Hoffman would agree that it could not.
And I could go on.
Why the deceit on the reason for the "Gift of Fairness" for foreign property owners limited for a "mistake of law"?
Why stop all Furnished Holiday Lettings with no consultation.
How many poor caravan owners are going to be disadvantaged because the Revenue have made Errors and Mistakes in Law.
When this Labour Government make mistakes when drafting legislation why does the Revenue then blame the tax and non tax professionals.

There are no time limits for going back to the beginning of FHL. FA 1984 I believe.

"What lies, this outgoing Government tell us".

As Brown said of Blair.

"I can't believe anything you say".

WHAT CHANGES WITH NEW LABOUR ?

There are changes and Brown & Co will tax you more and more"

We must look at their appointed Revenue Agents of deceipt and remember their answers

"We are only carrying out Govt. orders, Sir"

The Sherif of Nottingham robbed the poor to feed the Fisc, for spend, spend, spending.

D.H. in his recent podcast looked to the side and looked very shiffty, (particularly with his lip curl.)

For Cassius is a lean and hungry man. "Such men are dangrous; for they think to much".

Dear Reader,

Make your own mind up and ask for adequate consultation as in Camden.

Are the Revenue tipping the weights of justice in their favour?

Answer.

"You better believe it". But is not the proverbial Hector who hectors - it is New Labour ;nd Same Old Labour.

I like Magna Carta and the Bill of Rights, The State must not opress/abuse the ubjects.

You too agree, Good!

I shall write to the Government to ask it to consult us and to extend the periods of consultation and in particular the ferago/fantasy/joke consultation on Modernising Powers, Deterents, Working with Tax Agents.
A Consultation Document.

As it affects all tax agents: consult in writing with the Dear Tax Leader about the complete lack of Revenue balance in ensuring the Taxpayer, our Client has safeguards.

What must be good for Hector the hectorer should be equally reciprocated by Hector.

When Hector fesses up he must pay up in equal measure with penalties.

The balances of justice must be equally balanced on each side.

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