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Furnished Holiday Lettings Scheme - An opportunity for overseas property owners

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The 2009 Budget didn’t exactly bring welcome news for business owners. And thanks to the preoccupation of the general press with the new 50% tax rate for those earning over £150,000 per annum, one new piece of legislation, something which actually represents a positive change, was left hidden in the technical notes.

In his Budget, the Chancellor announced the repeal of the so-called “furnished holiday lettings” or FHL rules, with effect from April 2010. He also announced a very important change in the interim which will allow owners of qualifying overseas property to benefit from the tax advantages of the existing furnished holiday lettings (FHL) rules. But action needs to be taken as soon as possible.

What is the Furnished Holiday Lettings Scheme?

Currently, landlords who have income from furnished holiday accommodation in the UK are treated as if they are trading for certain tax purposes, provided the property is qualifying property in accordance with the furnished holiday lettings (FHL) rules. As it is treated as a trade, landlords with qualifying FHL businesses are entitled to claim loss relief against other income together with capital allowances relief, and can also claim certain capital gains reliefs such as entrepreneurs’ relief, business asset roll over relief and gift relief.

What was the change introduced in the 2009 Budget?

The Government believes the previous distinction between UK (qualifying) and overseas (non-qualifying) holiday accommodation may not be compliant with European law. Hence HMRC has decided it should repeal the FHL rules with effect from April 2010. Until this time, HMRC will regard these rules as applying to furnished holiday accommodation elsewhere in the European Economic Area (EEA). This therefore creates a number of interesting tax planning opportunities for clients.

Previously, landlords with income from furnished holiday accommodation which was not in the UK did not qualify for this beneficial treatment. Until the treatment is withdrawn in April 2010 however, property within the European Economic Area (EEA) is now regarded as qualifying property provided it meets all the other criteria.

With over 1 million Britons now reported to own an overseas property, this will be a welcome (if short-term) change, especially given the current state of the property markets, not to mention the value of Sterling! There are 30 qualifying countries which fall within the EEA, including all the EU members plus non-member nations such as Norway and Iceland.

What are the FHL qualifying conditions?

There are a number of criteria to be met for property to qualify as FHL, for instance, it must be let on a commercial basis; and be available to the public as holiday accommodation for at least 140 days in the tax year. Plus it can only be occupied by the same person for up to 155 days.

What are the tax advantages of the current FHL regime?

There are many advantages – too many to list in this article. The main ones to be aware of are that FHL property is eligible for capital allowances relief, which can be claimed on the acquisition of plant and machinery such as furniture.

Also, loss relief can be claimed against other income rather than just against other letting income and income generated qualifies as relevant earnings for the purposes of personal pension contributions. Furnished holiday letting property also qualifies as a business asset for entrepreneurs’ relief and there are a number of additional tax relief structures to consider.

If you own such a property, it is important to act quickly because the change will be valid until 5th April 2010. It is possible to make a late or retrospective claim, but in the main, these need to be submitted by the 31st July 2009.

So, this surprise announcement by the Chancellor has provided some interesting food for thought for overseas property investors. Now that some of the overseas property markets are stabilising after the initial crash, and given the continuing strength of the Euro in particular, many property owners will be considering the merits of selling their property. From a tax planning perspective, clients need to seek expert advice to weigh up the potential benefits from doing this before April 2010.

Finally, for those of you fortunate enough to have available funds to consider an overseas property purchase, it is worth considering the immediate tax advantages which will soon be lost. For example, you may wish to consider purchasing a qualifying property whilst the rules are in place in order to utilise the £50,000 Annual Investment Allowance and the new 40% First Year Allowances, thus maximising losses whilst they are available to set against other income.

About the Author
This guide was written by Lesley Stalker of the Robert James Partnership. To find out more about the tax advantages of the FHL rules for overseas property, email Lesley at las@rjp.co.uk

Posted July 24, 2009
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