There was a surprise for property owners in the Budget. The special tax breaks for furnished holiday lettings (FHL) are to be extended to cover properties in the European Economic Area (EEA) until 6th April 2010 but then entirely withdrawn from that date. There is a limited time in which to take advantage of the rules before they are withdrawn.
For a property – whether in the UK or within the wider EEA – to qualify, it must be available for letting for at least 140 days in the “season” and actually let for at least 70 days, but not for more than 30 consecutive days to the same person. A longer winter let (out of the “season”) is permitted. The letting must be carried on with a view to realising a profit.
If the rules are complied with then any losses are available for offset against other income, any capital gains on sale of the property can be rolled over into the acquisition of another trading asset and any gain on sale of another trading asset can be rolled over into the acquisition of an FHL property. It is also possible to claim holdover relief for capital gains tax where a property is given away. FHL profits count as earned income for the purpose of ascertaining the amount that can be contributed to a pension fund. None of these tax breaks apply to normal lettings.
The good news is that it may now be possible to make claims in respect of EEA properties let on the conditions described above for FHL going back several years. The bad news of course is that FHL reliefs disappear completely next April.
What action is possible before the rules change? Firstly, if you are considering giving an FHL property away then you may wish to do so sooner rather than later to secure holdover relief. Secondly you may wish to consider securing rollover relief either on a sale of the property before next April or on the acquisition of a new FHL property before then. Once a capital gain has been rolled over into an FHL property, the gain will not crystallise unless and until the property is disposed of. There is a limited opportunity therefore to use FHL properties as shelters for certain capital gains.
Some people suggest that FHL properties are exempt from inheritance tax, but that is only the case if there is a very considerable degree of service provision by the owner.
This article does not cover all of the issues or time limits you might need to consider and you should take advice tailored your own circumstances.
