Letting of property in the UK is not a trade for tax purposes and income from such activity is taxed as property income. However from early 1980s on UK tax laws allowed furnished holiday lettings (FHL) to be treated as a trading activity. This meant that FHL businesses enjoyed several of the tax advantages that were unavailable to a property letting business. Prominent among these were; a) being a trading activity losses incurred could be set off against other income, b) losses could be carried back up to 3 years, c) capital allowances could be claimed on furnishings and fittings, d) disposal of the business qualified for entrepreneurs’ relief, and e) roll over relief was available under capital gains tax.
The Labour government sought to repeal these rules effective April 2010 as FHL rules recognised only properties situated within the UK whilst EU rules required the same tax treatment for properties situated across the EEA. However, HMRC, as an interim measure, allowed recognition of properties situated within EEA from 22 April 2009. The new government while announcing the June 2010 budget overturned the 2009 changes and retained the original provisions for the tax year 2010-11 so the furnished holiday letting rules are still applicable. However, the qualifying criteria are being tightened and a consultation is on up to 22 October 2010 on the new rules to be applicable effective April 2011.
The proposed new rules applicable from April 2011 do recognise properties situated both within and outside the UK (within the EEA), but loss set off is only available against profits from the same FHL businesses. The other changes include increasing the number of letting days; to be available for letting to the public for at least 210 days (previously 140 days) and to be actually let to the public for at least 105 days (previously 70 days) over a 12 month period.
As the new rules are likely to come in to force a few months from now FHL businesses are advised to seek professional tax advice to devise appropriate tax planning measures to minimise their tax bills.
