From 6 April 2012 the “letting condition” of 105 days has to be met to qualify as an FHL. With the increase in days from 70 there is greater potential for the use of the “averaging rules”. There is a further advantage that there will be the availability of a “period of grace”. Here the owner may elect to treat the property as continuing to qualify for up to two later years even if the “letting condition” of 105 days has not been met. The twist in the tail is that the period of grace cannot be applied for tax years where averaging has been used by the taxpayer.
With the ability to claim FHL losses against total income ceasing after 5 April 2011 with the loss claim being restricted to offset against FHL profits there has been a major rush to maximise capital allowance claims and perhaps for plant that has not been previously identified. There have been specialist firms approaching FHL owners to help them identify all the omissions perhaps on, say, purchase, improvement or “self-build”. A Tribunal case (Jennings) allowed an input VAT claim on an FHL self-build with the ability to go back if the paperwork is in place. This is now HMRC Business Brief 29/10.
FHLs should qualify for Entrepreneurs Relief (ER) for Capital Gains Tax (CGT) purposes provided the conditions are met. ER is available on the disposal of the whole or part of a business, or of an asset used in a business when that business ceases. It is not available on the disposal of an asset used in a continuing business. This creates immediate practical problems.
Where there are a portfolio of FHLs can ER ever be claimed unless all or the majority of the FHLs are sold? If a taxpayer owns two FHL properties and sells one, has he sold part of his business, or merely an asset used in a continuing business? The principles – and difficulties – of distinguishing between selling ‘part of a business’ and simply selling business assets are set out in HMRC’s Capital Gains Manual (paragraphs CG63530 to CG63543). In an FHL context, the most important considerations are likely to be geographical proximity and whether there are separate management and advertising arrangements.
Whether this Inheritance Tax (IHT) test will be satisfied on FHLs so that business property relief can be claimed will depend on the facts. The question is if such businesses would not be excluded by the IHT rules (IHTA 1984, s 105(3)). The criterion is where the owner (either himself or through agents), ‘was substantially involved with the holiday maker(s) in terms of their activities on and from the premises’. The key issue in order for cottage owners to secure maximum tax relief is to be involved in the actual services provided.
Risk areas which might jeopardise the IHT claim are:
• Where no services are provided to holidaymakers;
• Where lettings are to friends and relatives; and
• Longer-term lettings (including assured shortholds).
All FHLs (and FHL portfolios) must be reviewed in the short term from all angles of profitability, letting conditions, possible unclaimed capital allowances and unclaimed input VAT for a self-build. All future plans must be assessed to consider eligibility for future claims for ER and IHT reliefs. Complicated times ahead…
By Julie Butler