26 October 2009

Rural update - autumn: No let up for furnished holiday lettings

The 2009 Budget announced important changes to the taxation of furnished holiday lettings (‘FHL’). Income from FHL businesses in the UK has been treated as trading income which enables owners to set losses and capital allowances against other income and claim holdover, roll
over or entrepreneurs’ relief on a sale or a gift. It was announced that this tax treatment would be extended to owners of FHL in the European Economic Area.

Those with properties outside of the UK will have a brief opportunity to take advantage of this tax treatment and, in particular, will have until 31 January 2010 to amend their 2007/08 tax return.

However, this tax treatment is temporary. From 6 April 2010, income from FHL will no longer be treated as a trade, which will be a blow to the UK tourist industry. Owners of FHL will be well advised to undertake a strategic review of their FHL business to decide if any action should be
taken before April.

Where a FHL is running at a loss, capital expenditure should be accelerated to the current tax year so that losses can be set against other income. Where owners have been considering a sale, they should not delay if they want to benefit from entrepreneurs’ relief on up to
£1m of gains and an effective rate of tax of 10%. There will be similar timing issues for owners who have been considering a gift to the next generation and hoping to hold over the gain until a future sale. It has now become clear that these changes should not affect the eligibility of FHL for business property relief for inheritance tax purposes. HMRC have, however, made it clear that any claim for business property relief will be scrutinized carefully to see how the properties are managed and so any strategic review should include a review of the inheritance tax position.