The legislation to amend the Furnished Holiday Letting (FHL) legislation is introduced by section 52 and Schedule 14 of FA 2011. As the rules finally reach the statute book, Rebecca Benneyworth offers a summary of advantages and traps that will come into play from April 2012.
The outline characteristics of the Furnished Holiday Letting (FHL) rule reforms to bring the UK in line with European law have not changed through the tortuous formulation process that has taken more than two years. Some aspects of the favourable tax regime applying to FHL activities are retained, but new more restrictive conditions and amended loss relief provisions make the regime considerably less generous. Here is an overview of themain changes that are now in place.
Extension to EEA activities
Schedule 14 extends the favourable tax regime applying to FHL activities to properties in the European Economic Area (EEA). This treatment has been in place for some time, but has been non-statutory until now. Part 4 of Schedule 14 makes the amendments to CGT to allow EEA FHL activities to benefit from the CGT reliefs available to UK FHL operations.
There are provisions to require the segregation of overseas FHL operations from other overseas property activities for both capital allowances purposes and for the purposes of loss relief (see below). EEA FHL activities are also quite separate from the operation of a UK FHL activity for all purposes.
Amendments to ITA allow all EEA FHL activities to be treated as a separate single deemed trade, rather than segregating by reference to the various locations in which properties are operated. The profits of the EEA FHL activity are deemed to be relevant UK earnings for pension purposes (new section 328B inserted into ITTOIA 2005 by Sch 14 para 2(8)).
This means that there are four heads of charge to property income :
- Conventional property income
- UK
- Abroad
- Furnished holiday lettings
- UK
- EEA
Qualifying periods
The periods for which a property must be available for letting and actually let increase with effect from April 2012 as follows:
- The property must be available for letting for 210 days in a tax year (up from 140 days)
- The property must be actually let for 105 days (up from 70 days).
However, the letting test must be applied separately to UK and EEA accommodation – these two sources are separate for all purposes.
The ability to average across properties owned by the operator to meet the qualifying periods remains in force, but there is no averaging between UK and EEA properties. The taxpayer can elect which properties are included in the averaging election and which are not.
Period of grace
New section 326A of ITTOIA 2005 and similar new section 268A of CTA 2009 for companies introduce the period of grace in relation to properties which do not meet the letting condition. Where a property fails to qualify only by virtue of the number of days actually let, a person can elect that the property is to be treated as meeting that condition in the two years following a year in which the condition was actually met. An election is necessary in the first of those years in order to be available in the second. The property must have qualified in one year (the base year) which is 2010/11 or a later year (by virtue of Sch 14 para 6) which means that qualifying under the lower limits in 2011/12 gives access to two years period of grace when the new higher limits come in. This provides a bridge to the new regime, particularly when an operator may be planning to cease and sell up – he would still be entitled to Entrepreneurs’ relief for a period of time.
Where this election is sought, it is not possible to make it when the property is already the subject of an averaging election for that year, so you will need to be very careful to monitor elections and dates to ensure that you don’t compromise your client’s position.
Note that there is no period of grace in respect of the period of availability. If this is breached, the property will fail to qualify in the period.
Loss relief
The change to loss relief for FHL losses applies from April 2011. In income tax it is achieved by simply excluding ITA 2007 Ss 64 – 82 and 89 – 95 from applying to FHL activities. This excludes all of the trading loss relief provisions apart from carry forward against future profits of the same trade (s 83 et seq). So losses incurred on FHL activities can, from 2011/12 only be set against future profits of the same trade, treating EEA and UK activities as separate businesses. There are no sideways relief provisions, nor is there terminal loss relief on cessation of the business.
Capital allowances
From April 2011 where a property ceases to qualify as an FHL in a period, but it still let, and therefore falls to be treated as a normal letting, the capital allowances rules have been modified to provide that there is a deemed disposal and acquisition at market value of assets in the pool, so that a balancing allowance or charge is taxed on the operator. The market value is capped at the original cost of the assets for this purpose.
Obviously when a property starts to qualify once more as FHL, the operator may wish to treat those assets as reacquired by the FHL business as the availability of capital allowances is more favourable. The operator will therefore probably seek to treat the assets as once again acquired at market value.
Where an operator has a multi property site this may entail some detailed record keeping to allow the adjustments to be made where necessary.
