In his last Budget before he was ejected from Number 11 Downing Street, Alistair Darling announced the abolition of the tax reliefs for landlords of Furnished Holiday Accommodation (FHA). He had already warned us he was going to do this in 2009, when he was forced by our masters in Europe to extend the relief from UK properties to any property in the European Economic Area (EEA).
Fortunately, in order to get the Finance Act through before the General Election, Darling was obliged to drop the FHA legislation, so for 2010/11 the reliefs are still there, and they apply to any properties in the EEA which meet the following rules:
• They are available for letting to the public generally on a commercial basis as furnished accommodation for at least 140 days in the tax year;
• They are actually let as above for at least 70 days each tax year;
• They are not normally let to the same person for a continuous period of more than 31 days, or if they are, such lettings must not total more than 155 days in the tax year.
The tax reliefs for FHA are significantly more generous than for ordinary furnished lettings:
- • Capital Allowances (including the £100,000 Annual Investment Allowance) can be claimed for plant and machinery installed in the property, including “integral” items such as electricity and cold water plumbing – in most cases this means 100% relief for such capital expenditure;
• Losses can be set off against any other income for the tax year;
• Profits count as earned income for the purpose of making pension contributions;
• The various reliefs for Capital Gains Tax (CGT) applicable to assets used for a trade apply to FHA, so capital gains on FHA or on other business assets can be “rolled over” if you reinvest the sale proceeds in other FHA (or assets used in another trade), and if you make a gift of FHA you can “hold over” the capital gain.
Entrepreneur’s Relief from CGT
Entrepreneurs’ Relief (ER) reduces the rate of CGT on the disposal of FHA to 10% (instead of 18% or 28% depending on your income for the tax year), but beware if you have more than one FHA property. The relief only applies if you dispose of “a business” or “part of a business”, and if you have more than one FHA property and sell only one, HM Revenue & Customs (HMRC) is likely to argue that you have merely sold one asset used in your business rather than “a part” of it.
The analogy is with a farmer who sells a field (no ER), rather than selling all his pasture, his dairy, and his dairy herd, while keeping his arable fields (the sale of the dairying side is a sale of “part of” his business and ER is due).
Inheritance Tax and Business Property Relief
Business Property Relief (BPR) reduces the value of business property by up to 100% for the purposes of Inheritance Tax, thus effectively exempting some business assets from tax on your death. HMRC used to accept that BPR applied to FHA, but back in November 2008, they changed their minds, saying that FHA would only qualify if a significant number of services were supplied to the tenants in addition to the use of the property.
My most recent experience of their new attitude has been to get BPR for a holiday park consisting of a large number of FHA units which also offered a 24 hour concierge service, a swimming pool, sports fields, a shop selling hot food to take away, and a bar. I fear that the average holiday cottage would probably not qualify.
Practical Tip
During the summer, HMRC is to publish a consultation document about changes to the rules from April 2011. The likely outcome will be:
• Lengthening the 70 and 140 day “qualifying periods” (see above); and
• Restricting the ways relief for losses on FHA can be claimed.
By James Bailey
