It’s not often that my articles call for readers to take action, but this one does.
The regime for Furnished Holiday Lettings has provided extra tax breaks for many years – so long as you could meet the strict tests. Having been recently extended to property in Europe, then given a stay of execution until 5 April 2011, we may see dramatic changes for 2011/12.
So what’s the action I want? Well, the new government has had the Treasury issue a consultation document about proposed changes. If they are of interest to you, or you might be affected, I would like you to read it. It is easy to email a response to their 9 questions. The deadline for responses is 22 October 2010.
You can read the consultation document at http://tinyurl.com/2vtkhtm
When you open up the document you see it looks big – at 40 pages, but the document content is all on just 11 pages – 3 to 13. The rest is guff, waffle and detail for trainspotters.
Before I tell you what the proposed changes are I should set out briefly what the current system is, up to 5 April 2011. Furnished Holiday Lettings are lettings where:
- The property is in the UK or the EEA (European Economic Area)
- The letting is done on a commercial basis, hoping to make profits.
- For at least 7 months of the tax year it is not let to the same people for more than 31 days (this rules out student lets)
- The property must be available for commercial letting for 140 days or more
- In fact it must be let for at least 70 days. (Lets for over 31 days do not count).
These complex rules are poorly understood by many landlords and some accountants. As a result some landlords do not realise that they qualify. This ignorance can mean they lose out on the valuable tax reliefs. The main tax benefits of Furnished Holiday Lettings, currently, compared with ordinary rental are:
- If you make a loss it can be set against other income – producing a tax refund
- When you sell the property Entrepreneur’s Relief can mean you pay Capital Gains Tax at 10% rather than 28%.
So what’s causing the government to want to change all this? Effectively until recently this treatment was only available for UK properties. Then the government realised that limitation might break EU law. So, temporarily, they had to extend it to all properties in the Europe (the EEA). By extending it they ended up offering tax breaks to many more British taxpayers. Thus the aim now is to cut down on the tax breaks and save the government money.
What, then are the main changes proposed?
- Raise the number of days available for commercial letting from 140 to 210.
- Raise the number of days let commercially from 70 to 105.
- Stop the tax relief which allows setting losses against other (non-rental) income.
The effect of these changes, if they go ahead without amendment, will be to reduce the number of properties which qualify as Furnished Holiday Lettings. The properties which fail will therefore cost their owners much more in CGT on a sale or transfer to the family.
Furthermore, for those who can still meet the tests, there will be the abolition of loss relief against other income. (Losses will only be allowed to be carried forward to future income from the Holiday Lettings.)
For what it’s worth I think the 105 day requirement for actual lettings is the scariest aspect of the proposals. Many properties struggle to have tenants for 100 days a year. I am suggesting in my own response that the 70 limit be raised, but only to 90, not 105. Readers might like to state their preferred limit when they respond to the Treasury.
The loss relief changes will affect a lot of people. About one-third of all people declaring Furnish Holiday Lettings claim loss relief against other income. All those people will suffer with the suggested restrictions. They need to speak up if that concerns them. Rather than simply whinge, their response needs to set out the dangers to the tourist industry. For example might the property be removed from the rental market?
When replying to the consultation document all you need to do is answer, in your own words, 9 questions. If you have nothing to contribute on some of the questions just type ‘no comments’. The response is then emailed to the Treasury at email@example.com
There is no opportunity to submit paper responses, though you could always post a letter to the Treasury, but it might be ignored!
Remember, if this topic interests you, your response needs to be emailed by 22 October 2010.
Adrian Huston, a former tax inspector, is a director of Belfast tax and accountancy firm Huston & Co – www.huston.tv or 028 9080 6080.