Furnished Holiday Lettings

Does your holiday home qualify as a Furnished Holiday Let (FHL) property? And if it does, what are the tax advantages?

Does your property qualify?

From April 2012 the following conditions apply:

  1. The property must be situated in the UK or EEA.
  2. The property must be available for commercial letting as holiday accommodation for at least 210 days per annum.
  3. The property must be let on a commercial basis for at least 105 days per annum.
  4. The property must not be let for periods of longer term letting. Accordingly, for 7 months of the year the property must not be in the same occupation for more than 31 consecutive days and must not exceed more than 155 days in a tax year.
  5. Periods of longer term letting do not count towards 3 above.

The periods to which you need to apply these tests are:

  • For a continuing let, the tax year.
  • For a new let, assuming that property did not qualify as a FHL in the previous year, apply tests to first twelve months of letting.
  • When letting ceases apply tests to last twelve months of letting.

There are complex rules that allow you to average the occupancy figures where you have more than one property in your FHL business. All of your UK FHL properties form a single trade for tax purposes. Any EEA properties form a separate trade. So you cannot average UK and EEA numbers. This averaging process can be useful where you have one or more properties that do not qualify and others that more than qualify for FHL status.

If you pass the test in 3 above for one year but fail it for the next 1 or 2 years, then you may be able to elect for those years to be treated as qualifying.

What are the tax advantages?

As your FHL business is considered to be a trade you will be able to avail yourself of the following reliefs that would not be available to non-FHL property letting businesses.

  • You can claim capital allowances on the purchase of furniture, white goods and other qualifying expenditure.
  • You may qualify for certain Capital Gains Tax reliefs including Entrepreneurs’ Relief, Business Asset Rollover Relief and relief for gifts and similar transactions.
  • FHL profits count as earnings for UK pension relief.

Beware of losses though, as these can only be carried forward against future FHL profits.

If you would like to see if your property holding(s) qualify for these important tax advantages, please contact us and we will help you work through the necessary calculations.

Buying or selling a commercial property

Owners of business property will be aware that certain parts of commercial buildings are treated as fixtures and fittings and capital allowances can be claimed.

From April 2012 sellers of commercial property should ensure that they have maximised any claims for capital allowances and have a full track history available to potential buyers. If appropriate elections are made the buyer will continue to enjoy the benefits of any unclaimed allowances.

Buyers in particular should make sure they get full details of past allowances claimed so that they can evaluate the value of any capital allowances they may be able to claim in the future.

From 2014 if a seller has failed to identify and ‘pool’ the expenditure qualifying for capital allowances (even if tax relief is not claimed) then any buyer will be unable to make a capital allowance claim in respect of this expenditure.

The message is clear. If you own, or are considering the purchase of commercial property before 2014, make sure you obtain professional advice to ensure that valuable tax allowances are not lost. Otherwise, as a seller, you may devalue your property as a prospective purchaser may be prepared to pay less than they would if capital allowances were available.

HMRC to stamp on residential property transactions

How much Stamp Duty Land Tax will you pay when you buy residential property in the UK following the Budget?

Firstly the extension of the nil rate band to £250,000 for first time buyers ceased 24 March 2012.

The current Stamp Duty Land Tax (SDLT) rates are:

Residential property purchased outside disadvantaged areas

Zero charge – £0 to £125,000

1% charge – £125,001 to £250,000

3% charge – £250,001 to £500,000

4% charge – £500,001 to £1,000,000

5% charge – £1,000,001 to £2,000,000

7% charge – Over £2,000,000

15% charge – on properties over £2m held in a “corporate envelope” (see below)

 

The 7% and 15% charges were introduced in the Budget last month. The 7% charge applies to property purchases completed after 22 March 2012.

 

The 15% charge has been introduced to counter a tax device that aimed to avoid SDLT charges on high value residential property purchases. The scheme involved purchasing through offshore companies, so-called “corporate enveloping”. The 15% charge will apply from 21 March 2012. In his Budget speech George Osborne made it clear he would close any variants of the scheme that are created in the future; if necessary the Government would introduce retrospective legislation.

 

Residential property purchased in a disadvantaged area

If a property you are purchasing is inside one of the 2,000 disadvantaged areas you may qualify for Disadvantaged Areas Relief. The only change to the SDLT rates listed above is to the nil rate band. If a property is located inside a disadvantaged area the nil rate band applies to property transactions up to £150,000. The 1% charge is adjusted accordingly, and applies to the band £150,001 to £250,000.

 

If you want to see if a property you are about to purchase qualifies for Disadvantaged Areas Relief you can use HMRC’s search tool at http://www.hmrc.gov.uk/so/dar/dar-search.htm

Taxation of jointly owned property

Where property is owned jointly it is possible to divert income from a high rate taxpayer to a low rate taxpayer without necessarily giving up the beneficial interest in the underlying property.

Between husband and wife and civil partners a simple transfer of legal title into joint names, with no change in the beneficial interest will mean that the rental income is automatically split 50:50 for tax purposes between the spouses (s.836 ITA 2007). If a different split of income is required then the beneficial interest must be held in the same proportion as the desired split of income and a joint declaration under s.837 sent to HMRC.

For non-spouses the situation is different. Where there is any beneficial joint ownership (for example 99:1) this gives an opportunity for the rental income to be split in whatever proportion the owners agree between themselves. So if a taxpaying grandparent for example owns a rental property and wishes to pass income to grandchild in a tax effective way without transferring assets they could give a 1% beneficial interest (covered by annual CGT exemption) and agree to split the income however they wish, even as much as 99% to the grandchild. This could form the basis of some useful late planning for school fees for example.

Putting your kids on the property ladder

Many people worry that their children will never be able to afford to buy a home, not without some help from Mum and Dad.

So, what are the tax implications of giving them a helping hand?

If they are aged 18 and above, the simple option is to make a gift of the deposit. You can provide a guarantee to the mortgage company. The gift of the deposit will be brought into the inheritance tax computation, but only if you die within seven years of making the gift.

If the children are under 18 the easiest option is to buy the property yourself (or yourselves, husband and wife together) and to gift it to the child when they become 18. There will be capital gains tax (CGT) to pay, if the property has gone up in value since you bought it. CGT is charged currently at up to 28%. The first £10,600 of gain per parent is exempt, and it is possible to give away a proportion of the house over a number of years. Although bear in mind the value of the property could go up, as you wait for another year to go by!

Perhaps a better option is to purchase the property in the first place with the child as beneficial owner, and the parent(s) as legal owner. This can be done with a simple declaration of a bare trust (held in the parent(s) name on behalf of the child. It is wise to get a solicitor to draw up the paperwork for this. This might make it more difficult to obtain a mortgage, a good broker should be able to help.

If the property is let, the income will be assessed on the parent(s). There is a way around this, if someone other than the parent(s) can provide the deposit, for example perhaps grandparents. Warning, do not think you can ‘give’ the deposit to someone, who can then give it to your child, this would be fraud!

Another option would be to set up a trust for your child or children, which could buy property. This is a complicated area, and professional advice is required.

Capital allowances and property

Series of air conditioners at UNC-CH.

Image via Wikipedia

Landlords of residential property are at a disadvantage when it comes to claiming capital allowances on plant and machinery. Plant in a ‘dwelling house’ does not qualify for capital allowances. It is, however, still possible to claim capital allowances on plant installed in common areas.

Common areas, for example, in a block of flats.

Commercial property landlords suffer from no such restrictions and can claim capital allowances on the cost of any plant and machinery they install.

The rates of capital allowances vary according to thetype of the plant. Most items of  plant qualifies for a ‘writing down allowance’ at a rate of 20% per year – which will reduce to 18% from April 2012, but certain items which are ‘integral’ to a building only qualify for a lower rate of 10% – reducing to 8% from April 2012.

‘Integral’ plant includes:

  • Electrical systems
  • Cold water systems
  • Systems for heating, ventilation, hot water, and air conditioning
  • Lifts, escalators, and mechanical walkways
  • External solar shading

Annual Investment Allowance (AIA)

Any of the above types of plant, qualify for the Annual Investment Allowance (AIA), which gives tax relief for 100% of expenditure on plant and machinery up to a limit of £100,000 for the year. This limit is also being reduced in April 2012, to a mere £25,000, so if you were thinking of spending substantial amounts of money on plant in your building, now is the time.

A word of warning to limited companies – if your accounting period does not end on 31 March, the allowances are time apportioned. The details are complicated and you might want to take advice on this, particularly if it going to affect your decision on spending.

Most plant installed in a building is likely to be ’integral‘ as defined above, but with the AIA allowance, in many cases the expenditure will be covered by the AIA and will never be subject to the lower rate of writing down allowance.

Additional costs to claim!

The costs of transporting the plant to your building, and of installing it, are considered part of the cost of the plant, and can thus qualify for the AIA.

Also included is the cost of alterations to an existing building which are done for the purpose of installing plant and machinery. For example, if  installing a lift in a building, the cost of the lift shaft – including the bricks and mortar – can be treated as part of the cost of the lift itself, and thus will qualify for the AIA.

Note that this only applies when altering an existing building, not constructing a new one. If installing plant and machinery involves an extension to an existing building, you might be able to show that the alterations were ‘incidental’ to the installation of the plant and machinery. ‘Incidental’ has been defined asbeing required in order to install the plant. Liaise with your architect, builder, and quantity surveyor to ensure that all relevant expenditure is identified, the plans and the invoices should indicate those works that were ‘incidental’ to the installation. An appropriate proportion of these professionals’ fees can also be treated as part of the cost of the plant.

Act now, it may soon be too late!

If you purchased a building, together with plant, and have never claimed for the plant, you can still make a claim. However, the government started a consultation process in May 2011 on whether to continue to allow capital allowances claims on purchases of commercial property regardless of the purchase date. As the legislation stands at the moment a claim may be made for qualifying “plant and machinery” within the property with no time limitations applied as to the date of purchase.

It would seem that the government have realised, if the current regime continues, it will potentially be vulnerable to the loss of millions of pounds through tax rebates and reduced tax income. Given the  state of the public finances,  the UK the government wants to retain as much money in HMRC’s tax take as possible.

If the Government does manage to reduce how far one can go back in making a capital allowances claim then many owners will have lost out without ever realising it. Many landlords of homes in multiple occupation (HMO’s) have already lost out, to a great extent, due to changes that HMRC introduced in October 2010 as will many owners of furnished holiday lets (FHL’s) if they do not review how recent changes have affected their rights to make a capital allowances claim.

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Property purchases to go on HMRC database

Later this year your solicitor, or property conveyance person, will be required to file new forms with the Stamp Duty Land Tax Office when you buy a property.  The regulations allow old forms to be used, or the new forms, from 1 April 2011 to 3 July 2011. After 4 July 2011 only new forms can be filed.

No cause for alarm thus far.

Unfortunately the devil is in the detail!

The new forms require that each lead purchaser provide the following unique identifier when completing the forms:

  • Individuals – their National Insurance number, or
  • Companies and Partnerships – their Unique Tax Reference (UTR) or VAT registration number.

Wonder what HMRC will do with this additional information? No doubt they already have, or will be, setting up tracking processes that link property purchases to the lead purchaser’s tax file.

Tax refunds on holiday property

If you have a commercial furnished holiday let within the EU, then there is potential for a tax refund.

Did you know up to 30% of the purchase price of a furnished holiday letting may be eligible for capital allowances? If these allowances are higher than your profits from rental income, any excesses may be set against tax payable on general income such as salary or business profits. There is a limited window of opportunity to make use of this “set off”, or sideways loss relief, as it will only be available until 5th April 2011.
Capital allowances are available on plant and machinery such as fitted kitchens, plumbing, central heating, loose furniture, and equipment.

backyard swimming pool

Image via Wikipedia

How it works
Typically, the level of plant and machinery is between 10 and 30% of the purchase price of the property, for example:

On a £500,000 property in Spain, the potential allowances are up to £150,000 made up of heating system, swimming pool, sanitaryware and electrics, amongst many others

This would translate to a total tax saving of £75,000 for a 50% tax payer!

What conditions must you satisfy?
The property must be in the UK or in the EU
The property or properties must be run on a commercial basis
Available to let for 140 days per year, and actually let for over 70 days per year
Not let to long term tenants for over 155 days per year
Long term letting is to the same person for over 31 days

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Small firms to feel rates pain

The FSB is concerned that small firms with empty properties could pay thousands extra in rates with changes to the exemption from paying empty property rates due to come into force from April.

The exemption, introduced in 2009, meant that businesses with an empty property in England with a rateable value below £18,000 did not have to pay business rates. The Government plans to cut this threshold from £18,000 to just £2,600, placing a very significant burden on many small firms that are struggling in the current economic climate.

Just as alarming is the fact that the Government will not re-introduce a 50 per cent relief and that small firms will not be able to claim Small Business Rate Relief on the property.

This means that struggling business owners who have had to vacate a property and cannot rent or sell it will have to pay more in rates than if they were running a company from the property.

The FSB has written to local government minister, Bob Neill MP, to express its concerns that this move could put some small firms out of business.  If the threshold is going to be cut then the FSB calls for a return to the pre-April 2008 situation of granting 50 per cent relief or at the very least, allow a business to claim Small Business Rate Relief on their empty property.

Roger Culcheth, Local Government Policy Chairman, Federation of Small Businesses, said:

“The Government has said that small businesses have a vital role in driving economic growth and getting the recovery on a firm footing, yet for some businesses this additional tax could tip the balance and force them into insolvency.

“The result of this cut in the threshold without restoring the 50 per cent relief will make small business owners worse off than they were prior the 2009 change and significantly more so then they were in 2009 and 2010. We urge the Government to look closely at this matter and, at the very least, allow the business to claim Small Business Rate Relief.”

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Furnished Holiday Lettings

HMRC are presently consulting with interested parties with the intention of changing the rules for the tax treatment of FHL property from April 2011.

We thought readers would be interested in the specific proposals being discussed:

1.Currently, a property must be available for commercial letting to the public for 140 days and be let for at least 70 days. The intention is to extend these periods to 210 days and 105 days respectively.
2.Currently, losses created by the letting of FHL property are available to set off against other income of the same tax year. It is now possible that this will be restricted from April 2011 such that you could only carry losses forwards to set off against future FHL profits.
3.Currently, if you make a claim for capital allowances by concession you are allowed to claim even in years when FHL status is denied. From April 2011 if a property does not qualify a claim for capital allowances will be denied.
Planning opportunity

For those of you who have qualifying FHL property in the UK or EC there is a planning opportunity between now and April 2011 that you should consider.

In particular:

1.If you are considering a significant refurbishment, new furniture, kitchen etc, that will qualify for capital allowances in 2010-11, you may be advised to quantify the tax advantage of doing so. The current Annual Investment Allowance is £100,000.
2.If you made a tax loss as a result of a claim for capital allowances, you may be able to set the loss against other income and recover tax already paid.

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