The End of the Holiday – Furnished Holiday Accommodation and the EEA

The End of the Holiday – Furnished Holiday Accommodation and the EEA
Among the vast pile of paperwork released by HMRC as Alastair Darling sat down on Budget Day, there were two measures representing a climb-down by the Government in the face of pressure from our friends in Europe. One of them, relating to inheritance tax and “agricultural property”, was good news, but the other, concerning “Furnished Holiday Accommodation”, was not.


What is Furnished Holiday Accommodation (“FHA”)?

FHA is property let as furnished residential accommodation, which falls within certain definitions:


·         It must be available for letting to the public generally for at least 140 days in each tax year.

·         It must actually be let for at least 70 days each year, and none of those lettings can be to the same person for a period longer than 31 days.

·         If there are any lettings longer than 31 days, the total of those letting periods must not be more than 155 days.

·         There was one other condition, which I will come to later – and it was the one that caused all the trouble!

This typically covers a property let during the holiday season to a series of short-term visitors, and with a longer “winter let” of no more than 155 days. It is important to note that the word “holiday” in the legislation has no meaning – you do not have to prove that your tenants were on holiday, or even that they were having fun!


Tax Breaks for FHA
Landlords of FHA enjoy a number of tax breaks not available to those who let ordinary residential accommodation, furnished or unfurnished.


·         Loss relief. Normally, if you make a loss on a letting business, you can only carry that loss forward to use against future profits from the letting business. If the loss arises from FHA, you can claim relief against any other income you have in the same tax year, or even the previous tax year.


·         Capital Allowances. Normally, a letting business cannot claim capital allowances on plant and machinery (for example, cookers, TVs, furniture, and so on) that is in residential accommodation, but a FHA landlord can.


·         Pensions. Profits from FHA count as “relevant earnings” for the purpose of pension contributions, so you can get tax relief for such contributions up to the amount of your FHA profits.


·         Married couples/civil partners. Where property is jointly owned by a married couple or civil partners, the profit from it is taxed 50:50 on each of them, or they can if they wish elect for it to be taxed in proportion to their actual ownership of it – so if the husband owns 20% and the wife 80%, they will still be taxed 50:50, unless they choose to be taxed on an 80:20 basis. In the case of FHA, however, they can divide the profit between them in any proportion they like, irrespective of the size of each spouse’s share in the property.


·         Entrepreneur’s Relief. On a sale of FHA, the rate of CGT on the gain can be 10% instead of the usual 18%


·         Roll-over relief. If you sell FHA and spend the sale proceeds on another FHA, you can “roll over” any capital gain, thus deferring payment of the tax until the new FHA is sold. This relief extends to the sale or purchase of other business assets, so if you sell your pub (for example) you can roll over the gain into FHA and either retire and live on the rents or sell the FHA at a later date and roll the gain over again into (say) another pub. FHA has often been used as a convenient way to “park” a capital gain while looking around for a new business.


·         Hold-over relief. If you gift your FHA to (say) your children, you will be deemed to have sold it at its market value for tax purposes, but you can make a claim to “hold-over” the resulting gain, so that your children take the property over as if they had bought it at the price you originally paid for it. This meant, for example, that if you wanted to gift your second home to the children, you could let it for a year within the FHA guidelines and then give it to them with no CGT to pay.


·         Inheritance Tax. This one was already under attack by HMRC before Budget Day, but in some circumstances you could claim that your FHA was “business property” and thus effectively exempt from inheritance tax when you died.


The Other Condition

There was one more condition for a furnished letting to qualify as FHA – it had to be within the UK.


Following moaning from our friends across the Channel, HMG had to agree that this was discriminatory and contrary to European Law. HMG therefore hastened to make things fair, by abolishing all the special treatments referred to above so that FHA is to be treated in the same way as any other furnished letting.


A Window of Opportunity?
The abolition of the tax breaks for FHA takes effect on 6 April 2010, so the current tax year is the last one during which we can enjoy them, but in a few cases, there may be retrospective claims to be made.


If you own property outside the UK, but within the “European Economic Area”, and it would have qualified as FHA if it had been in the UK, you can now claim any of the reliefs explained above to which you would have been entitled, and those claims can be retrospective.


In reality, of course, there will be few people who can make such claims, because if their property was not in the UK there would have been no point in sticking to the quite restrictive rules about the length of time it was let to the same person, and even if by chance you did fall within the time limits, you may have a hard time proving it. If you did own a European property that you let on a short term basis, however, it must be worth reviewing your lettings history to see if you qualify.


Time Limits
These are rather tricky – different limits apply to claims for relief under the different categories described above, and you need to take advice about this, or to study the “Technical Note”  published by HMRC on 22 April ( ) but don’t delay – the shortest time limit (for certain of the reliefs for the tax year 2006/07, or for company accounting periods ending on or after 31 December 2006), expires on 31 July 2009.


James Bailey