Landlords with income from furnished holiday accommodation in the United Kingdom (UK) are currently treated as if they are trading for certain tax purposes, as long as they satisfy certain tests, under the Furnished Holiday Lettings (FHL) rules. Julie Butler discusses HMRC’s published draft legislation for this change at the Pre-Budget Report 2009: Draft Legislation to Repeal the Furnished Holiday Lettings Rules.
What are the FHL Rules that Disappear at 5 April 2010?
The letting of property is not a trade. Income from letting property is taxed under the property income rules. However, the FHL rules treat the commercial letting of furnished holiday accommodation as a trade for certain specified tax purposes.
Under the FHL rules, those who let qualifying holiday accommodation are treated as though their FHL business is a trade for the following purposes:
• Loss relief;
• Capital allowances;
• Landlords Energy Saving Allowance (LESA);
• Certain capital gains (CGT) reliefs (including business asset rollover relief, entrepreneurs’ relief, relief for gifts of business assets, relief for loans to traders and exemptions for disposals of shares by companies with a substantial shareholding); and
• Relevant UK earnings when calculating the maximum relief due for an individual’s pension contribution.
From 2010-11, FHL businesses will be treated in the same way as other types of property business.
Is There a Furnished Holiday Business (FHB) or FHL?
The distinction between trade and property income is a long established principle in UK tax law. In most cases it is clear whether income derived from the ownership and occupation of land is chargeable to tax as profits of a property business or of a trade.
The commercial letting of furnished holiday accommodation will usually be a property business. The owner derives income by allowing a third party to occupy property for a specified period.
Furnished Holiday Business (FHB)
The answer is to establish a Furnished Holiday Business (FHB) not an FHL.
How does the FHL become an FHB service? What are the real criteria?
Examples of services which go beyond those normally provided, and which may amount to a separate trade are:
• The regular cleaning of rooms when they are let, and not just between changes of tenant;
• The regular supply of clean linen; or
• The regular provision of meals.
According to HMRC the provision of these services does not make the whole activity a trade.
The Twist in the PBR Tail – The Split of Income
HMRC have advised that receipts from the trading services are to be taken into account in calculating a separate trading profit and receipts from letting the property are taken into account in calculating the property business profits.
HMRC further advise that single payment which covers the two separate activities must be apportioned for tax purposes. The apportionment should be on a reasonable basis that reflects the value of each activity. Expenses may also need to be split between trade and property business.
This approach is considered to be incorrect since in these circumstances there is only one indivisible business. Legislation and tax case law supports a one business approach so careful consideration will be required.
Practical Tip
Look at what action can be taken up to 5 April 2010 to take advantage of the old rules, i.e. claim of maximum expenses or to utilise the capital gains tax (CGT) advantages of disposing as a business asset and rolling into a business asset.
Think holiday business as a hotel to ensure the business reliefs are protected.
Julie Butler
