Original Article by Sophie Howard – November 2009 (see comments for updates)
In the April 2009 Budget it was announced that the rules for furnished holiday lettings (FHL) in the UK would be withdrawn in April 2010, but what does this really mean for landlords?
Sophie Howard ACA, our Agricultural Manager, takes a look at the implication for farmers and other owners of furnished holiday property.
The Current rules
For property to count as a holiday letting you are probably aware it must be:
- In the European Economic Area.
- Available to the public for at least 140 days a year.
- Commercially let for at least 70 days a year.
- Consist of short lets of not more than 30 days.
- Only let for 210 days a year.
FHL’s are treated favourably for tax purposes, as currently you can:
- Set losses against other income in the same way as trading losses.
- Claim capital allowances on the cost of furnishings, furniture and equipment.
- Use Entrepreneurs relief to reduce effective CGT rate to 10% instead of 18%.
- Hold over and rollover relief are available.
- FHL profits count as pensionable income.
The new rules – from April 2010
For basic holiday lets, all of the above 5 reliefs will be abolished as your holiday let income will be treated like any other property rental income. This is very frustrating for farmers along with other owners of self-catering properties including some caravan parks.
However, some tax reliefs will still be available if you can prove your holiday letting income is trading income (a business) and not just investment income.
NB For VAT purposes nothing has changed and so you still need to charge VAT at the standard rate if your business is VAT registered. This could change so keep an eye on the Budget announcements.
Key points and Tax planning opportunities
The main opportunity arises if you are able to treat your “holiday let” as a “holiday business”!
- What can you add or do to prove your FHL is treated as a business or trade? It is important to demonstrate that you provide services to your guests such as meals in the farmhouse, laundry, transport etc. The more additional services provided, the more likely the business will qualify as a trade.
- Business Property Relief (BPR) can be allowed on FHL’s and this may continue in the future. Where it is available, the tax payable on death is reduced as 50% or even 100% of the market value of the business excluded from IHT. However, once again it is important to demonstrate that it is a business property. For instance, ensure that:
- Lettings are short term (for example weekly, fortnightly).
- The owner has involvement in the business.
- Lettings are not just to friends and relatives.
Farmers have been encouraged by the government to diversify and add other income streams to their core business which many farmers have done. This could though prejudice future eligibility for BPR. In the case of Farmer v IRC in 1999, it was held that an element of investment activity is acceptable providing the trading activity dominates. So it is important to demonstrate that the farm business is the main trade and that the owner has involvement and is needed in both sides of the business.
It is important to consider your individual circumstances and be careful if the holiday business is run separately, for example by the farmer’s wife (this may have been set up for VAT reasons). There may be an opportunity for a Potentially Exempt Transfer (PET).
For caravan parks it is becoming more important to look at the level and type of service provided rather than who is providing the service.
Other planning points are:
- If you are thinking of selling your holiday business it may be advisable to do before 5 April 2010 to take advantage of the extra CGT reliefs available!
- If you were considering passing on the holiday accommodation to the next generation this may be a time to do so.
- Loan planning should be considered as for IHT purposes it is more efficient to have the loans secured on non-business property.
- Consider maximising expenditure on your FHL before 5 April 2010 to claim the capital allowances available. However, with any expenditure you should always ensure it is commercially viable.
This is just a brief overview of the changes and we do not know what is going to happen in the pre-budget speech on 9 December 2009.
If you would like to discuss any of the above please telephone either Jonathan Crowther or Sophie Howard on 01386 552644.