GOVERNMENT TIGHTENS FHL RULES (06/04/11)
The recent Budget saw a number of changes regarding Furnished Holiday Lettings (FHL) taking effect from April 2011 and 2012.
While there has been an element of relaxation in some areas, for the most part the government seems to have tightened up both the benefits - as well as the ability to qualify.
Pre 2009, FHL rules only applied to furnished properties situated in the UK. However, now any furnished property within the EEA can qualify. UK FHLs and EEA FHLs are treated as two separate businesses.
Currently to qualify, FHLs need to be available to let for 140 days and actually let for 70 days within any one tax year.
From 6 April 2012, these rules will change. FHLs must then be available for 210 days and actually let for 105 days.
Where businesses hold a portfolio of properties, they may apply these occupancy rules on an average basis rather than on a property by property basis to reduce the administrative burden.
While this in itself is not a new rule, there may be a relaxation in the way that it can be applied. For a businesses that may slip in and out of the rules from year to year, HMRC may now allow a business qualifying in one year to elect to be treated as if they meet the criteria in the following two years.
HMRC does seem to have tightened up the rules on FHL losses. Until 5 April 2011, FHL losses will be treated as any other trading loss. After this date, however, they can now only be carried forward against future FHL profits from the same business, i.e. UK FHL losses against UK FHL income and EEA FHL losses against EEA FHL income.
Capital Gains Tax
There are no changes to the beneficial capital gains rules for FHLs. They will remain eligible for Holdover, Rollover and Entrepreneurs’ reliefs.
For Entrepreneurs’ relief and the Capital Gains tax rate of 10% to apply, it is important to remember that it only applies to the sale of part or all of a FHL business. Selling one or two out of nine properties will not attract the relief, whereas selling eight or all nine should.
Providing conditions are met for the 12 month period, previous use of the properties is ignored which provides a planning opportunity – properties outside the FHL rules could be brought into the regime for 12 months before being sold and benefit from the beneficial ER rate of CGT.