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FURNISHED HOLIDAY LETTINGS

IMPACT OF BUDGET 2009 CHANGES

Background

Furnished holiday lettings have always been taxed as part of a property business.
Legislation has, however, allowed special rules to apply for furnished holiday lettings
which are detailed below.

In order to satisfy the criteria to qualify as furnished holiday lettings the holiday
accommodation must be:-

a) Available for commercial letting to the public generally as holiday

accommodation for at least 140 days in the 12 month period, and

b) Is so let be let for at least 70 such days

Tax benefits

The income is treated as if it was generated from a trade for tax purposes. This
means that the landlord is entitled to:-

a) Claim loss relief as if it was a trade – this allows any loss to be set against other
income.

b) Treat the holiday home as if it were an asset used in a trade so that those
selling the property can postpone tax and rollover the gain by investing in
another property or by benefitting from entrepreneurs relief, paying capital
gains tax on the profit at 10% rather than the normal 18%.

c) Claim that the furnished holiday letting property will qualify for Business
Property Relief and be free from inheritance tax should the deceased Estate
include such an asset.

d) Claim plant and machinery allowances on applicable capital expenditure. This

can mean that up to 100% of expenditure on items such as furniture, equipment
is tax deductible in the year of expenditure. This is not normally allowed with
other property letting.
e) Treat profits from letting of furnished holiday lets as relevant earnings for
calculating their ability to make pension contributions.
H.M. Revenue & Customs concerns

There has been a suggestion that since the current rules only apply to landlords with
income from furnished holiday accommodation in the UK that this approach is not
compliant with European law. To tackle this the Revenue have allowed those who let
furnished holiday accommodation within the European Economic Area to benefit from
the existing FHL rules up to 5 April 2010. From 5 April 2010 the rules in relation to
furnished holiday letting will be appealed and all income from furnished holiday lets
should be taxed in the same manner as other property rentals without the favourable
tax treatments detailed above.

Unfairness

• Many providers of furnished holiday accommodation carry on their business in

the same manner as those operating other accommodation such as hotels,
guest houses etc.

• Many providers of holiday accommodation have a number of employees who

actively manage and market their properties generating their only source of
income. The inability to make pension contributions based on this income will
have a long term impact on their financial position. It could be that such
individuals will be able to reclassify their business as a trade but we move into
one of H.M. Revenue & Customs grey areas and at minimum we should receive
some guidance on this.

The textbooks refer to the possibility of treating the lettings as a trade if the
landlord provided services such as cleaning, laundry and meals. It doesn’t
make any reference to the efforts managing the property, marketing the
property, attending to enquiries via e-mail, letter etc.

• Many individuals will have planned their acquisition of a property or properties

in the knowledge that they would have significant capital gains, income tax and
inheritance tax advantages. The removal of these advantages will impact
greatly on the financial planning of such individuals.

• In a time when the government should be doing more to promote and assist the
indigenous tourism industry these changes to the rules are very unwelcome.

• There was a similar challenge to the Agricultural Property Relief rules which did
not apply to any land other than those outside the UK. The Budget 2009
extended the relief to all farm land which meets the definition located within the
UK and European economic area. It seems strange therefore that the Revenue
allowed one change which encompass property within the European Economic
Area and the other which has the removal of the tax advantages of all property
within the UK and EEA.