Tax relief for letting abroad
In last week’s article I mentioned a change to the furnished holiday lettings regime which slipped out on Budget Day.
This has generated a lot of interest so today I will explain the matter in more depth. If you have had furnished property outside the UK, which you let out, then this article may save you money.
Until now if you had rental income within the UK there were two alternative ways to declare it to HM Revenue & Customs.
The normal way was as rental income on page two of the property pages of your self assessment return.
Sometimes your UK rental property passed the tests to be defined as Furnished Holiday Lettings (FHL). If so then the income was declared on page one of the property pages.
‘Who cares which page?’ — I hear you cry. Indeed. The point is that furnished holiday lettings have tax advantages to them. I will use the abbreviation FHL in future to save on some ink.
The advantages of FHL treatment include:
- Losses made can be set against other income, generating tax refunds.
- Capital Allowances can be claimed.
- Capital Gains Tax savings possible — business asset rollover relief, entrepreneurs’ relief etc
- Profits count as income when working out how much you can pay into a pension.
By far the most common advantage is the loss relief one. With normal rental, losses made can only be carried forward to set against rental income in future. With FHL the property business is treated as a trade.
Trading losses can be set against your total income for a year — saving you tax. You can even carry them back to the previous tax year and get a refund.
So far I have set out the two ways to declare rental income from the UK.
Until now if your rental income was from a property outside the UK then it was declared as rental income on the foreign pages of your tax return. No furnished aspect mattered and no losses could be set against general income.
HMRC has now realised that this singling out of UK properties may not comply with European law. Thus they are making two changes:
1. Extending FHL to cover European properties, until 2009/10, then
2. Abolishing the FHL regime from April 6, 2010.
This might seem a bit odd, but not if you think about it from the perspective of a cash-strapped government.
HMRC have been giving a generous tax relief to some people, but not enough people. So they are forced to open up the relief. Natural reaction then is to stop the relief altogether in future!
The properties now included within the FHL regime are those situated in any country of the European Economic Area — the EEA.
To save you time I can tell you these are all EU member states plus Iceland, Liechtenstein and Norway. The changes are important if you may have Furnished Holiday Lettings in the EEA, but outside the UK, because your tax may change.
This could affect you for 2006/07, 2007/08 or 2008/09.
Also for the final year of FHL — 2009/10. In other words it may affect tax returns which you have already submitted.
There’s an important deadline here. If you want to amend your 2006/07 tax return then HMRC is giving you until 31 July 2009 to do so. Not long.
To amend your 2007/08 tax return you should have until January 31, 2010. If you have not done your 2008/09 return yet then be sure to use the new basis.
Remember that any changes to your earlier tax returns may change the amount of losses you bring forward into 2008/09. What then are the tests for this wonderful Furnished Holiday Lettings treatment? They are:
- Property must be in the EEA.
- Property business must be carried on commercially and with a view to a profit (even if you don’t always make one)
- Must be available for letting 140 days in a tax year.
- Must actually be let commercially for 70 days.
- Letting to be 31 days or less to same tenants (rules out student accommodation).
You can read the details of HMRC’s position on this at http://tinyurl.com/cdj8vg. Their document also goes into how to claim for an adjustment to an earlier year.
Definitely something to do in writing, not on the phone.
Adrian Huston, a former tax inspector, is a director of Belfast tax and accountancy firm Huston & Co – www.huston.co.uk or (028) 9080-6080