Treasury flies under radar with Furnished Holiday Lettings change

As well as wading through the endless Budget Notes and Press Releases, I now have to pay attention to Technical Notes too. It was in this hitherto neglected format that the Treasury chose to reveal far-reaching changes to the taxation of Furnished Holiday Lettings ("FHLs").

For many years the Government has granted favourable tax treatment to owners of FHLs. Provided the property met criteria on total periods of letting, availability for letting and length of lets, the profits or losses therefrom have been eligible for favourable tax treatment in the following respects:

Offset of losses against general income

Availability of capital allowances, despite their use in a dwelling house

Availability of entrepreneurs' relief, rollover relief, relief for gifts of business assets, relief for loans to traders and substantial shareholding exemption

Treatment as relevant earnings for pension purposes

It was for a long time also assumed that inheritance tax business property relief was available on FHLs, but this has recently been cast into considerable doubt.

This quasi-trading treatment appeared to recognise the importance of FHLs to the UK's important tourist trade, and had become a feature of the UK tax landscape.

However, FHL treatment was limited to property in the UK, which is almost certainly unacceptable under our EU treaty obligations. So the good news is that, for 2009-10, the favourable tax treatment of FHLs has been extended to FHLs throughout the European Economic Area (broadly the EU plus Iceland. Liechtenstein and Norway). But the bad news is that, from 2010-11. FHL treatment will be withdrawn entirely.

The good side of this is that those with EEA FHLs can claim some retrospective tax reliefs if it suits them to do so. Provided they claim by 31 July 2009 they can go back to tax year 2006-07 for individuals or to accounting periods ending on or after 31 December 2006 for companies. They will also still be in time to amend later returns under normal time limits. However, the impact of this is likely to be somewhat reduced by the fact that, in general, countries retain the right to tax income derived from property in that country by non-residents, and thus usually tax would be payable in the country in which the FHL property is situated, with the UK giving credit for such tax against UK liabilities.

However, what of the impact on the FHL industry in the UK with effect from April 2010, and what is the validity of the Government's reasons for withdrawing FHL status? To answer the second question first, the actual impact of having to extend FHL status throughout the EEA area would largely be confined to capital gains tax, because of the retention of taxing rights over property income by the host country. Thus we are looking at the difference between a 10% effective capital gains tax rate and an 18% rate, due to the impact of entrepreneurs' relief. The other thing I would say is that the government usually has to be dragged kicking and screaming to alter tax provisions that are deemed prejudicial to residents of other EU countries, but here they seem to be happy to volunteer a change. And they also seem to be keen to bury the change in an obscure part of the copious Budget paperwork.

One might therefore conclude that they are only too happy to have this excuse to withdraw the relief, and thus generate additional tax revenue in future.

So what effect will this have on the FHL sector? Well, if anyone has any sense they will rush to upgrade their property in 2009-10 and claim lots of capital allowances (remember that there is now a 100% allowance on the first £50,000 of plant and machinery expenditure), thereby generating a loss which they can carry back up to 3 years under the enhanced loss relief provisions, provided it does not exceed £50,000 (interesting correlation of figures). Or they will look to sell it in 2009-10 with the benefit of entrepreneurs' relief, but I am not sure the property market is in the right state to recommend that course of action.

Having done the property up, people might decide to live in it (having had their tax relief) or just use it as a holiday home (thereby reducing the supply of property for one of our key industries) or wait for the property market to rise again and sell it or even carry on letting it as before, maybe. But has the Government thought all this through? Past evidence is not encouraging in this respect (happy memories of the corporation tax nil rate band come flooding back).

Mark Simpson

23 April 2009

Comments

[Sue Fitch]

Surely this will force people to sell their holiday cottages and if there are a shortage of holiday homes in this country families will go holiday abroad, spending their money outside the u.k.
This will mean lots more c02 from all the extra flights. We don't have any industry left in this country. I thought the Government would encourage not kick holiday cottage owners. Does anyone agree or are we all prepared once again to lie down and take this Government?