Furnished holiday lettings - time to let go?
Current furnished holiday letting (FHL) tax rules will be abolished next April. Time is running out to use valuable business reliefs.
If you're the owner of a let UK property that qualifies as a furnished holiday letting (FHL) for tax purposes you have, until now, enjoyed a number of benefits. As long as the lettings were short term, the property was available for letting for at least 140 days per tax year and actually let for at least 70 days, then many of the reliefs that apply to businesses have also applied to your property. These include setting off losses against other income for the year and certain capital gains tax reliefs, such as entrepreneurs' relief and holdover and rollover reliefs.
The changes
In his Budget, the Chancellor announced the extension of the FHL tax treatment to properties within the European Economic Area - mainly to comply with European law. But this will be short-lived, as the FHL rules will be abolished from 6 April 2010.
HMRC is now more reluctant to allow business property relief (BPR) on FHLs, believing it has granted relief in the past to cases that did not qualify. This change may prompt you to consider whether it's time to pass FHL property to the next generation. But don't think about it too long, because valuable reliefs will disappear next April.
The trust option
If retaining the income from your holiday letting is important, there may be tax advantages in transferring the property to a trust. But beware of the strict conditions that ensure a transfer doesn't fall foul of inheritance tax rules. It would not be possible to defer the capital gain, but you may be eligible for entrepreneur's relief to reduce the effective rate of capital gains tax to 10%, subject to conditions. The value of the transfer into the trust must also not exceed the nil rate band for IHT (currently £325,000 per person). With property values down, this could be an opportunity not to be missed.
Family transfers
If income from the property is less important, you are in a much better position. If you make an outright gift of your FHL property to, say, an adult son or daughter, it will be exempt from inheritance tax if you survive seven years. Business holdover relief may also be used to defer any capital gain on the property until it is sold, but only if the transfer takes place before 6 April 2010. The capital gain may be avoided altogether if the property is used as a residence by the beneficiary.
Timing matters
Of course, all these reliefs are available only if the FHL conditions above apply. If you are thinking of transferring a holiday letting that will rely on obtaining business relief to defer or reduce tax, you must do so before 6 April 2010 and it may be better to wait until near the end of the tax year to ensure the FHL conditions for the year are met.
If you are considering transferring your furnished holiday letting or want more information about the reliefs available to you, please contact your usual Littlejohn tax adviser or email tax@littlejohnllp.com
