If you let out a furnished holiday home in the UK, your rental income may be treated as a business for tax purposes. This is a big advantage over normal buy to let income which is treated as an investment. However, your property must meet some rules known as 'qualifying tests'.
Quote: "For my part, I travel not to go anywhere but to go. I travel for travel’s sake. The great affair is to move." (Robert Louis Stevenson 1850-94 “Travels with a Donkey”)
To be given treatment as a qualifying furnished holiday letting the property must be let or available for letting for no less than 140 days a year, and it must actually be let for no less than 70 of those days. If this includes one or more tenancies lasting more than 31 days each, then the aggregate of such tenancies must not exceed 155 days (ITTOIA 2005 s 325). If the property was not let as a furnished holiday letting in the previous tax year then the foregoing tests apply for a period of 12 months commencing with the date on which the property was first so let. This allows a furnished holiday letting business that starts less than 140 days from the end of the tax year to qualify from the start.
The accounts of a holiday letting business are prepared on the same basis as any other letting business save for the (taxation) points mentioned below.
Relevant losses may be offset (a) against general income of the year in which it is incurred or the previous year (b) against capital gains of the same year (subject to certain proviso’s) (c) against income of the three years preceding the year of loss where the loss was incurred in the four years following commencement of the trade (d) against future profits of the same trade.
Relief for losses may be denied if it can be shown that the lettings are not on a commercial basis. This is to prevent abuse of the loss relief where lettings are made “with a view to generating revenue to offset costs rather than with a view to realisation of profits” (Brown v Richardson (June 1997 Special Commissioners 129)). This decision denies loss relief to all those who want the holiday property for their own use and let it for some time to offset some of the costs.
The net income is treated as earnings for pension purposes (ITTOIA 2005 s328)
Rent-a-room relief could be claimed if the letting meets the criteria and the furnished holiday letting is in the taxpayer’s only or main residence.
While a furnished holiday letting is eligible for Capital Allowances there is no guidance how to switch from the 10% Wear and Tear Allowance nor how to deal with the situation where you have claimed Wear and Tear Allowance in the previous year. In practice the wear and tear allowance may be more beneficial and the lack of guidance is irrelevant.
There is some debate as to whether a property that has been used in a qualifying furnished lettings business is subject to IHT. The HMRC Capital Taxes Manual indicates that business property relief will be available as long as the lettings have been very short term and either the owner or someone acting for him/her is substantially involved with the activities of the holiday makers both on and from the property. However if the property is regarded as an investment then it may be subject to IHT (IHTA 1984 s105(3)).
Self-contained holiday accommodation is subject to business rates if it is let for 140 days or more per year. If a property is let long-term the occupier will pay the Council Tax but the property may not qualify as a furnished holiday letting.
The property and other items used in the furnished lettings business are eligible for roll-over relief if they are replaced (TCGA 1992 s 241(3)).
Until 5th April 2008 Taper relief is available at the rate applicable to Business Assets. However the gain may need to be split if the property has been used by the owner as well as being available to the public.
In a case heard in 1990 (Owen v Elliott (CA 1990) the Inland Revenue (as it then was) lost and it was held that if the property has been the taxpayers principle private residence at any time and it therefore had a period of exemption from Capital Gains Tax then the Residential Lettings Exemption (max (£40,000) is available. (TCGA 1992 s 223)
No relief is available in respect of expenditure on a property used for qualifying furnished holiday letting.
Page content supplied by: Maurice Patry FCA of www.landlordstax.co.uk
