Furnished Holiday Lettings – do you need to take action?

This year’s budget announced the withdrawal of the special Income Tax and Capital Gains Tax rules for furnished holiday lettings with effect from 6 April 2010.

In outline, the main changes will be:

Income Tax:
•   Losses can only be set against other rental income rather than all income.
•   Profits are no longer earnings for pension contribution purposes.
•   Stricter rules will apply where profit sharing does not tie up with ownership of the asset for married couples and civil partners.
•   Capital allowance claims will be replaced by the wear and tear allowance on furniture and furnishings.

Capital Gains Tax:
•   Holdover relief will no longer be available on a gift of the property
•   Gains realised on sale will not be eligible for rollover relief.
•   Gains realised on sale will not qualify for the new entrepreneurs’ relief and the 10% tax rate it can bring.

There is a window until 6 April 2010 when these advantages and reliefs are still available.

It should be remembered that the VAT rules are not changing, so holiday letting income is still liable to VAT at the standard rate if you are registered or are required to be registered for VAT.

Also, HM Revenue and Customs recently changed their opinion of when a holiday letting can qualify for business property relief for inheritance tax, making that relief harder to secure.

Now is a good time to review the tax and commercial position of your current holiday lettings.  Some key points you might want to consider are:

•   Does ownership need to be altered between spouses to allocate income correctly moving forward?
•   Were you relying on the income tax treatment for losses or pension funding?
•   What happens on the changeover from capital allowances to wear and tear?
•   Are there tax advantages to selling before the changes apply?
•   Should you consider succession planning within the family while holdover relief is still available?
•   What about the commercial side if tax reliefs are no longer available? Is it still worth running a holiday letting?

We strongly recommend that you review your position and consider what the tax changes will mean to you in order to help you decide whether any action needs to be taken over the next 10 months. 
Please contact our tax partner, Chris Bowker, to arrange a meeting on 01392 211233 or by e-mail cbowker@simpkinsedwards.co.uk

June 2009

Please note: The above resource is provided for general information only. No responsibility can be accepted by Simpkins Edwards for any use made of the information presented, whether acting or refraining from action as a result of the material published. No action should be taken without consulting a professional adviser.