Tax Treatments and Benefits

Tests for a property to qualify as a Furnished Holiday Letting:

The period to which the following tests apply are normally the tax year, but may be different in the year of commencement or cessation:

1. The accommodation must be available for commercial letting to the public, generally as holiday accommodation, for at least 140 days per annum.
2. The periods for which it is so let must amount, in aggregate, to at least 70 days.
3. For at least seven months the property must not normally be in the same occupation for more than 31 days.

Relief for expenditure on furniture, fixtures and fittings:

1. Expenditure on the above items is classified as capital expenditure and capital allowances are available (50% first year allowances for 2008/9 tax year and 25% thereafter).

Relief for losses:

1. FHLs are treated like a trade for loss purposes and so losses arising on the business may be relieved by setting them off against other income during the year.
2. If there is no other income against which losses can be offset the loss can be carried back to the previous year.
3. If you prefer the loss can be carried forward for use against profits of the same trade in future years.

Capital Gains Tax Treatment:

1. We are awaiting the final legislation regarding the new Entrepreneurs Relief that came into effect on 6th April 2008. This will determine whether the tax rate on the capital gain is either 18% or 10%.
2. You may claim business asset rollover relief to defer the gain arising on the disposal of the FHL.
3. You may claim holdover relief for when you wish to gift the FHL to a connected party.

To maximise both Business Property Relief (BPR) and Taper Relief, it is preferable for the business to be owned by one individual (or jointly with a spouse).

Inheritance Tax Treatment:

1. Inheritance Tax (IHT).
   As you know, IHT is charged on the estate of a deceased person. It is commonly referred to as Death Duties. Where total assets exceed the nil rate band applying at the time (in excess of £312,000), the balance of the estate is taxed at a flat rate of 40%.
   However, there is an exemption known as Business Property Relief (BPR). This relief applies to certain types of assets. Where the relief is due, the entire value of the asset attracts a 100% exemption from IHT. Therefore, the asset escapes the IHT charge. The relief applies to people who run their own trading businesses. It is the value of the business at the time of death that attracts BPR. It is hoped therefore that provided the accommodation qualifies as 'serviced accommodation' at the time of death, BPR may be due on its value.
   
   Conditions to be satisfied for BPR
   Conditions that must be satisfied (amongst others) are:
   
   1. The business must have been owned in the previous two years. This time period includes time inherited from a spouse’s ownership i.e. the combined period of ownership is taken into account.
   2. The qualifying business must be carried on at the date of death.
   3. The business must not be subject to a binding contract for sale.
   Assets that do not qualify for BPR include businesses consisting wholly or mainly in dealing in shares, land or buildings or in making and holding investments. So in other words, investment businesses do not qualify. The term investment business is defined in the Taxes Act and various legal judgements.
   
   
2. In certain circumstances, a property used for FHL can qualify for 100% business property relief for inheritance tax purposes and therefore inheritance tax would not be payable on the transfer of the property on death.
   This treatment only applies where lets are weekly or fortnightly and the business includes substantial involvement in the holidaymakers’ activities on and from the property. Substantial involvement could include providing a map of the local area, local tourist information, as well as laundry and cleaning services.
   As a guide, hotels and Bed and Breakfasts should qualify for business property relief and therefore the more closely the FHL business resembles these businesses, the more likely business property relief is to be given on the FHL.
   
   
3. As Planning UK Ltd will be carrying out all the above duties on behalf of the owner for a fee and the lets will be short term, it is likely that business property relief would be available.
   
   
4. Owned by a Limited Company?
   Where a business is owned as a limited company, care is needed on the ‘Associated Company’ rules. This is because there are thresholds that determine the rate of Corporation Tax that companies pay. These thresholds are shared between companies that are associated with one another.
   Companies are associated if the majority of share capital is owned by the same shareholder – or the shareholder together with spouses, parent, remoter forebear, child or brother or sister.
   It is recommended that you take advice from your existing accountant if you believe this situation applies to you.

General

The above is intended as a simple summary of the relevant legislation. All investors are encouraged to seek independent advice on matters that are important to them.

Tax rules can change at least once a year - sometimes more often.

No one can guarantee the availability of the relief’s and exemptions mentioned above. This is because individual’s circumstances vary.