Furnished Holiday Lettings

Landlords with income from furnished holiday accommodation in the UK are currently treated as if they are trading for tax purposes, as long as they satisfy certain tests under the Furnished Holiday Lettings (FHL) rules.

Landlords with income from furnished holiday accommodation elsewhere in the European Economic Area (EEA) have not previously qualified for this treatment. It is now considered that this difference may not be compliant with European Law and therefore the FHL rules are to be repealed with effect from 5 April 2010.

Those who have a property in the EEA may benefit because until 5 April 2010 HMRC will regard the FHL rules as applying to furnished holiday accommodation anywhere in the EEA. Consequently, it is possible to amend earlier year’s tax returns where there a property is let out as furnished holiday accommodation within the EEA, providing it meets all the requirements of the FHL rules.

The downsides and most important effects of this change are:

• Any income tax loss arising from the furnished holiday letting will no longer be available for offset against other taxable income, although losses can be carried forward and offset against the future profits of the property business.
• Capital allowances will not be available on expenditure incurred in providing equipment, furniture and furnishings for use in the property. 
• The property will no longer be classed as a business asset for capital gains tax purposes and so will not qualify for Entrepreneurs’ Relief.

We are awaiting the detailed rules as to what will happen to capital allowances pools at 5 April 2010, but if you are considering major capital expenditure or a sale of the property in the next year, please contact us for advice.

May 2009