by Property Lynx Lda based on information provided by Davis Langdon LLP
After the 2009 Budget, it was announced that the ‘Furnished Holiday Lettings’ (FHL) rules were to be extended to any country within the European Economic Area (EEA).
It was also announced that the rules would be withdrawn from April 2010, but following a change in Government, the rules will remain in place in their current form until April 2011. After that date, there will be some tightening up of the qualification criteria together with some restrictions in the way that loss relief is given.This very basic guide has been compiled to give owners of properties in Portugal information on how the rule changes may be beneficial to them. The information contained in this document has been obtained from information provided by Davis Langdon, the UK’s leading specialists in this area (Property Lynx Lda, are not tax specialists and cannot give tax advice in any form).
You should read this paper if:
o You pay tax in the UK
o You own a holiday property in Europe or the UK
o You let the property as self catered holiday accommodation
o You want to pay less tax or recover tax overpaid in previous years
What are the tax benefits of the FHL rules?
Specific legislation was introduced in the Finance Act 1984 to clarify the tax treatment of UK based self catering holiday accommodation.
This allowed the person providing the accommodation to treat the FHL business as if it were a ‘trade’ for tax purposes, allowing them to benefit from some tax advantage, including the following:
o Losses arising from the FHL business can be relieved against other income.
o Capital allowances can be claimed on plant and machinery (P& M) and these can be used to create or increase a loss.
Plant and Machinery falls into two categories:
o Chattels. This will include loose furniture and equipment, furnishings, bed linen etc. These are often referred to as the ‘furniture pack’ and are normally invoiced separately. The tax relief is, therefore, easy to claim.
o Integrated P& M. This includes aspects of the building itself, such as heating, air conditioning, sanitary ware, fitted kitchens, swimming pools etc. Putting a value on them that is acceptable to HMRC requires a valuation prepared by a specialist.
Each property is different and the level of P& M that you acquire will vary considerably; typically from 10% of the purchase price for very basic homes, up to 30% or more in some high spec properties. The actual tax savings vary and will depend upon the tax band applicable.
FHL qualification criteria
In order to qualify as a FHL, the following criteria need to be met.
o The property must be let on a commercial basis with a view to the realisation of profits. Second homes or properties that are only let occasionally or to family and friends do not qualify.
o The property must be located in the UK, or in a country within the EEA. Portugal is a qualifying country.
o It must be available for commercial letting at commercial rates for at least 140 days in the year. (From April 2012 the property must be available for at least 210 days).
o It must be let for at least 70 days in the year and you should be able to demonstrate the income from these lettings. (From April 2012 the lettings must be at least 105 days).
o It must not be used for more than 155 days for longer term occupation (i.e. a continuous period of more than 31 days)
o Where there are a number of FHL properties in a business, it is possible to average the days of lettings for the purposes of the 70 day qualification (105 days after April 2012).
Rule changes after April 2011
There will be a general ‘tightening up’ of the rules. There are implications for owners of FHL properties in both the UK and in the EEA and restrictions on the type of income that losses made in a FHL business can be used against.
There are also other important changes to this very complicated area of tax law. Davis Langdon are able to provide more detailed advice.
Why should I claim capital allowances?
Capital allowances will reduce the tax you pay on your profits. If you are not currently making profits on your FHL business, then the capital allowances can be used to increase the loss, which in turn can be set against any of your other income that is subject to UK tax.
After April 2011, the ability to use FHL losses against other income will be withdrawn, so it is important to make use of this opportunity while you still can.
Using capital allowances is a very complicated area of tax law and benefits vary according to individual circumstances and tax status.
The FHL criteria do need to be met if you want to benefit from the generous tax treatment offered by the FHL rules.
You do, therefore, need to be confident that you do, or will, meet the criteria, particularly the need for the business to be commercial in nature. Neither Property Lynx nor Davis Langdon can take any responsibility ensuring that these criteria are met.
Important points to remember
o If you can demonstrate that your business qualifies as FHL you are normally entitled to claim capital allowances.
o The procedures and methods employed by Davis Langdon have been worked out with HMRC over many years.
o To protect yourself, it is important to deal with experienced practitioners and to get expert advice from the beginning.
This basic guide has been prepared by Property Lynx Lda (http://www.propertylynx.eu), Chartered Surveyors, based on information provided by Davis Langdon LLP who have a team specialising in Capital Allowance valuations on FHL properties. If you believe that you own a property that may qualify as a furnished holiday let and wish to discuss things further, please contact Ian Rostron at Property Lynx Lda by email on firstname.lastname@example.org or phone 00351 96 5099 409