Special tax provisions apply to income from the commercial letting of furnished holiday accommodation. The special tax treatment for furnished holiday lettings was due to be withdrawn in April 2010, but was given a reprieve by the UK’s coalition government in the 2010 budget. The special tax treatment therefore continues as before though some aspects of the tax provisions may be changed in April 2011. The UK government intends to consult taxpayers on the following proposed changes:
amendments to ensure that the furnished holiday lettings rules apply equally to properties located in the European Economic Area; an increase in the number of days that qualifying furnished holiday lettings must be made available for letting, and the number of days that they must be actually let; and changes in the way in which relief is given when losses are made on furnished holiday lettings.
Some changes resulting from the consultation with taxpayers may be included in the 2011 budget.
Qualifying furnished holiday lettings
For the letting revenue to qualify as income from furnished holiday lettings, the property does not have to be located in any particular type of location such as a tourist area. The property must be let furnished with a view to profit and fulfill the following criteria:
the property must be available for letting to the general public as holiday accommodation for a minimum of 140 days in a tax year; the property must be actually let for at least seventy days in a tax year (ignoring any periods of longer-term accommodation, these being periods of more than thirty-one consecutive days when the accommodation was in the same occupation); and the property should not be in longer-term occupation for more than 155 days in a tax year.
If the taxpayer owns two or more properties, each satisfying the 140-day rule and the 155-day rule, but not all satisfying the 70-day rule above, the properties would nevertheless all be regarded as satisfying the 70-day rule if the average number of days that all the properties are let is at least 70, taking the average of all the properties together.
Tax treatment of furnished holiday lettings
Income from furnished holiday lettings is treated for tax purposes as trading income. This treatment enables the taxpayer to obtain certain tax advantages that would not be available if the income were to be treated as income from a property business.
Another advantage is that where losses are incurred on the letting of furnished holiday accommodation these can be treated as trading losses for tax purposes. This gives the taxpayer more flexibility as to how the losses can be offset against other types of income. Under the tax rules for trading losses they can be offset against any other income of the taxpayer for the same tax year, or for the previous tax year, or both. Losses set against the income of one or both tax years can also be offset against capital gains for the same period if the taxpayer so chooses. The losses may also be offset against future profits from the furnished holiday lettings.
In the case of a sale of the property used in the business of furnished holiday lettings, business asset rollover relief may be available in respect of any capital gains arising on the sale of the property. In this case, the sale proceeds of the property can be deducted for capital gains tax purposes against the cost of new business assets bought within one year before and three years after the date of the sale, thereby effectively deferring any capital gains tax arising until the new assets are sold.
Income from the furnished holiday lettings is regarded as earned income for the purpose of determining the tax relief available to the taxpayer in relation to pension contributions. This may increase the amount of pension contributions that could be made by the taxpayer in a particular tax year.
In addition to the above advantages, the taxpayer is also able to claim capital allowances on the cost of furniture purchased in respect of the furnished holiday lettings.
HM Revenue and Customs www.hmrc.gov.uk
“Taxation: Finance Act 2010” sixteenth edition by Alan Melville, FT Prentice Hall 2011