Furnished Holiday Lettings
Are special tax reliefs for furnished holiday lettings likely to become a thing of the past from 6 April 2010 in the light of the release on Budget Day of HMRC’s technical note sounding the demise of the legislative code for income tax and CGT contained in Income Tax (Trading & Other Income) Act 2005?
Furnished holiday properties let out in the UK which fulfil special conditions, such as letting out for at least 10 weeks per year, attract a beneficial tax treatment for income tax and CGT which allows the profits to be counted as earnings for pension purposes and permits losses to be set against other income – ss. 323 – 326 ITTOIA 2005.
The Budget 2009 has extended the beneficial income tax and CGT treatment to properties within the European Economic Area but at the same time HMRC has announced the repeal of this treatment with effect from 6 April 2010.
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For IHT purposes paragraph 25278 of the IHT Manual has for some time suggested that furnished holiday lettings should normally be allowed business property relief (BPR) where the lettings are short-term (i.e. weekly or fortnightly) and the owner is ‘substantially involved with the holiday-makers in terms of their activities on and from premises’.
New text replaced par. 25278 in November 2008 which now reveals HMRC’s change of heart:
“In the past we have thought that BPR would normally be available where:
- The lettings were short-term
- The owner – either himself or through an agent such as a relative – was substantially involved with the holiday-makers in terms of their activities on and from the premises
Recent advice from the Solicitor’s Office has caused us to reconsider our approach and it may well be that some cases that might have previously qualified should not have done so. In particular we will be looking more closely at the level and type of services rather than who provided them.
Until further notice any claim involving a claim for BPR on a holiday let should be referred to the Technical Team (Litigation) for consideration at an early stage.”
A useful article by John Endacott in Taxation Magazine on 21 May 2009 entitled ‘The end of the holiday’ provides a helpful summary of the existing rules. In particular he notes that if the statutory rules ‘deeming’ the activity to be trading for tax purposes are repealed as proposed in the Budget then we would be placed back in the pre FA 1984 era where what mattered was whether you actually had a trading business or not.
There was at that time uncertainty which the FA 1984 removed by introducing a legislative code. Given the importance of tourism to the UK economy it seems strange that there has been no consultation on the abolition of the legislative code with effect from 6 April 2010.
There is no reference to IHT in HMRC’s Technical Note of 22 April 2009 entitled ‘Furnished Holiday Lettings in the European Economic Area’ but then no draft legislation has been included in the Finance Bill 2009 in respect of the announced abolition for income tax and CGT so it is possible that next year’s Finance Bill may choose to abolish IHT BPR for furnished holiday lettings at the same time.
What is a ‘trade’?
To be fair BPR was only given by HMRC on the basis of whether or not what was undertaken was a ‘trade’ in compliance with s.105 IHTA 1984 and not by reference to the legislative code in ITTOIA 2005 for income tax and CGT. It has been possible to get BPR for a business of furnished holiday lettings particularly comprising a number of properties. HMRC have said they are going to examine claims for BPR on furnished holiday lettings more closely as a result of their announcement in November 2008 which brought about a change in the IHT manual.
The application of the new approach for IHT requires clients to review the services they offer and to make them more analogous to those offered by an hotel. For example:
- Meet & greet the guest on arrival
- Show them round the premises
- Explain the additional services on offer
- Supply of groceries on request
- Arranging booking and reservations at local restaurants etc
- Arranging newspaper deliveries
- Providing temporary membership of local sports facilities
- Providing information about local visitor attractions
- Supplying maps of the area
Set out in the letting agreement what services are included in the rental e.g.
- Provision of kitchen linen
- Making the beds
- Mid- week cleaning
- Disposal of rubbish on departure
- Maintenance of the grounds
- Charges for the use of the utilities e.g. gas, water & electricity
- HMRC’s starting position will be whether there is a business within s.105(3) IHTA 1984. They are looking for regularity of contact between the owner or his agent and the users of the premises during their stay. The provision of cleaning services does seem to be a key issue as well as the other things mentioned above.
- It remains to be seen whether the Budget announcement with regard to income tax and CGT treatment will also mean the demise of BPR relief for IHT on furnished holiday lettings. For now practitioners should ensure clients are made aware of the changes.
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