Furnished holiday homes - good and bad news

The commercial letting of furnished holiday homes situated in the UK is treated as a deemed trade if the conditions of the Furnished Holiday Lettings (FHL) rules are met. The main conditions are that the property is available for holiday letting to the public on a commercial basis for at least 140 days – and is actually let commercially for at least 70 days – in a 12 month period, and that it is not continuously let to the same person for more than 31 days in a seven month period. Advantages of trading treatment include relief for losses against other income, entitlement to capital allowances, and the availability of certain capital gains tax reliefs on disposal.
 
The good news, as announced in the Budget 2009, is that this treatment will be extended to properties situated in the European Economic Area (EEA), with retrospective effect. Owners of such properties may therefore now be able to claim relief for losses arising in previous tax years, or capital gains tax reliefs for properties that were sold in a previous tax year. For claims that require the amendment of tax returns for the 2006/07 tax year (or for companies, tax returns for accounting periods ending on or after 31 December 2006), HMRC has extended the deadline from 31 January 2009 to 31 July 2009.  Taxpayers will need to check as soon as possible whether they can make a claim.
 
The bad news is that the FHL rules will be completely abolished – both for UK and EEA properties – on 5 April 2010. Owners now have a very limited period to claim any remaining loss relief or to dispose of an existing qualifying property with the benefit of reliefs such as entrepreneurs' relief (which can reduce the effective capital gains tax rate from 18 per cent to 10 per cent).
 
Two points should be noted with regard to overseas properties – foreign taxes may be due on disposal and exchange rate movements can convert an apparent loss (in foreign currency) to a taxable gain (in sterling) - so all aspects need to be carefully considered.  In all cases it will certainly be worth checking the position.
 
From 6 April 2010 the only FHLs which will be taxed as a trade will be those which amount to a trade on first principles. These are more likely to be linked to hotel operations and it is unlikely that traditional FHLs will qualify.

To summarise:

• You can claim losses against your income for 2006/7 to 2009/10 and get a tax repayment.
• You can reduce your Capital Gains Tax bill or reclaim anything overpaid.
• You can use any profits to increase your pension contributions and eliminate tax liabilities for 2009/2010.

For a free and confidential review of your position and to benefit from our no win no fee strategy please contact us now.