Holiday home owners, beware!

Up until this year, second home owners who let out their property as a furnished holiday let have been able to enjoy generous loss reliefs, safe in the knowledge that any gain on the eventual disposal of the property will qualify for a reduced 10% capital gains tax rate. The previous government were keen to abolish this privileged tax status; however, following a difficult period of consultation the coalition government has offered holiday home owners a lifeline, albeit with tougher qualifying rules and relief restrictions.

The key change to the rules is already in place.  With effect from 6 April 2011 loss relief is restricted and it is now no longer possible to set furnished holiday let losses against other general income.  Losses will still be available for tax relief but only against future profits from the same furnished holiday letting business.

The other big change is to the number of days the property must be available to let, and actually be let in a tax year.  These new qualifying rules are designed to catch out second home owners who perhaps only let out their property on a part time basis whilst retaining it for their own use for the rest of the year. 

Those who let out their property to students in term time and to holiday makers in the summer months will also be affected, as well as holiday home owners in parts of the UK where the tourist season is particularly short.

From 6 April 2012 the qualifying days that a property must be available for short term letting to the public will be increased from 140 to 210 days in a tax year, and the qualifying days the property must actually be let is to be increased from 70 to 105 days. 

From a practical point of view, the most problematic change to the qualifying rules will be ensuring the property is let for 105 days in a tax year and there will be many businesses who switch between qualifying and not qualifying on a year-on-year basis. As a concession, HM Revenue & Customs will introduce a two year period of grace where it can be established that there was a genuine attempt to let the property for 105 days. The period of grace covers businesses that meet the rules in one year but not the next two but is only available if the relevant election is submitted to HM Revenue & Customs.  This period of grace will only apply to the 105 day test.  If the property is not available to let for 210 days the holiday home owner will lose furnished holiday letting status immediately regardless of the days it is actually let.

For those who have a furnished holiday home, consideration should now be given as to how lets can be increased to 105 days from 6 April 2012.

Many of the valuable tax reliefs are still available, but only if the holiday let continues to qualify under the new day counting rules. Capital Gains Tax Entrepreneurs’ Relief should still be available on the disposal of the property.  This can effectively reduce the rate of tax payable on a gain on disposal of the property to 10%.  There will also still be capacity to “hold over” any gain on the gift of a property and to “roll over” any gain on a disposal into the purchase of a new property. In both cases, capital gains tax can be avoided on a the gift or purchase of new qualifying property.  However, it should be noted that although these reliefs are still available it will be harder to qualify as a furnished holiday let following the introduction of the tougher day counting rules from April 2012.  Therefore, it may be prudent to consider disposing of a property prior to 5 April 2012 if it will no longer qualify as a furnished holiday let and bank these valuable reliefs.  This may not be a realistic course of action for many given the current state of the property market.

With good planning capital allowances will also still be available on the purchase of plant and machinery as long as the new qualifying day conditions are met.  The allowances available to the owners of furnished holiday lets are far more generous than the 10% wear and tear allowance available on normal rental income.

One tax that has never relied upon the furnished holiday letting qualifying conditions is Inheritance Tax and this remains the case.  A furnished holiday let may still qualify for the 100% business property relief exemption, despite not meeting the new day counting rules, if it can be shown that significant services are offered to the guests which point towards the property being let on a commercial basis with a view to the realisation of a profit.

Finally, the VAT position also remains unchanged.  VAT is accountable on furnished holiday lettings at the 20% standard rate once the VAT registration threshold, presently £73,000, is breached.  However, VAT registration may not be all bad in that it facilitates VAT recovery on all associated refurbishment, maintenance and day to day running costs.  The icing on the cake being that there is no VAT on the tip left by the content holiday maker!

By Peter Young, Director of Tax, Edinburgh.