Good News for Furnished
Improved capital allowances and tax relief
IT’S THE kind of good news which is on a par with “your house has burned down but we saved the photographs”, but the Pre-Budget Report in December did bring some relief for landlords with furnished holiday lets.
The Story So Far
In April 2009, the Government announced its intention to abolish the beneficial tax regime for furnished holiday lets from 6th April 2010. The vast majority of furnished holiday lets will therefore be treated as ‘normal’ residential lettings from 6th April 2010.
The Pre-Budget Report contained the long awaited transitional rules to deal with the change from the current regime to ‘normal’ residential lettings status. Quite surprisingly, these transitional rules are about as generous as we could have hoped.
Under the current regime, furniture and equipment purchased for use within furnished holiday lets qualifies for capital allowances. These are also available on part of the cost of new furnished holiday letting property, including heating, air conditioning, plumbing, lighting and electrical systems.
Expenditure of up to £50,000 on qualifying items during the year ending 5th April 2010 will qualify for immediate tax relief. Any additional qualifying expenditure attracts a writing down allowance of 20%.
Existing furnished holiday letting landlords get these allowances in full but, for those who are new to the furnished holiday letting business, they must be proportionately reduced. If you buy your first furnished holiday letting property now and rent it out for the first time on 27th March 2010 (the Saturday before Easter), you will only have a furnished holiday letting business for ten days this tax year. This would entitle you to immediate tax relief on just £1,370 (£50,000 x 10/365) of qualifying expenditure and a writing down allowance of just 0.55 % (20% x 10/365) on the rest.
This hardly seems worthwhile but what the Pre-Budget Report confirmed is that any qualifying expenditure incurred up to 5th April 2010 will continue to qualify for capital allowances in 2010/11 and beyond. The future allowances will be given at 20% of the amount unrelieved to date.
This means that every single penny of qualifying expenditure incurred up to 5th April 2010 on furniture and equipment in furnished holiday letting property, as well as other items like heating and electrical systems, will provide tax relief at some point, including expenditure by landlords who rent out their first furnished holiday letting property by that date.
Frances has had a furnished holiday letting business for several years and buys three new properties on 1st February 2010. By 5th April 2010, she has incurred a total of £70,000 in qualifying expenditure for capital allowances purposes.
In 2009/10, Frances can claim capital allowances of £54,000 (£50,000 + £20,000 x 20%). This leaves £16,000 of unrelieved expenditure carried forward. In 2010/11, she claims £3,200 (£16,000 x 20%), then £2,560 in 2011/12, £2,048 in 2012/13, and so on.
Janis buys her first furnished holiday letting property in January 2010 and rents it out for the first time on 27th March 2010 having spent £30,000 on furniture and equipment, heating and other qualifying items. Because she is a new furnished holiday letting landlord, Janis will only be able to claim capital allowances of £1,527 in 2009/10 (as explained above).
However, Janis’s remaining qualifying expenditure of £28,473 carries forward to 2010/11, when she will be able to claim £5,695 (20%). Janis will then be able to claim £4,556 in 2011/12, £3,645 in 2012/13, and so on.
The message is simple. Anyone with an existing furnished holiday letting business, or who starts one by 5th April 2010, will eventually get full tax relief on all qualifying expenditure incurred up to 5th April 2010.
And it gets better! From 2010/11, furnished holiday letting landlords will be able to claim the 10% wear and tear allowance (10% of rents receivable after deducting items like utility bills, rates and cleaning costs). The wear and tear claim will be unaffected by any capital allowances which the landlord is also claiming. So, buying new furniture and equipment by 5th April 2010 will effectively yield double tax relief!
Capital Gains Tax
The next piece of good news is that, until 5th April 2013, furnished holiday letting properties will also generally continue to be eligible for entrepreneurs’ relief - the relief which gives rise to an effective Capital Gains Tax rate of just 10% on the first £1m of eligible gains per person.
For sales taking place after 5th April 2010, the position is a little complicated and it looks like you need to sell the property as a stand-alone asset and not as a business, but entrepreneurs’ relief should nevertheless usually still apply.
The bad news is that most furnished holiday letting properties will cease to be eligible for both rollover relief and holdover relief on gifts with immediate effect on 6th April 2010. This means that gains from disposals before 6th April 2010 can be rolled over (i.e. deferred) by reinvesting the sales proceeds in a new furnished holiday letting property before 6th April 2010, or in qualifying trading property (i.e. your own trading premises), at any time within three years of the disposal.
A gain on the sale of your own trading premises could also be rolled over into the purchase of a furnished holiday letting property before 6th April 2010 but no gains can be rolled over into new furnished holiday letting properties purchased on or after that date.
Gains rolled over into existing furnished holiday letting properties still held at 6th April 2010 will become taxable when the relevant property is sold. It will not be possible to roll these gains over again.
The gain arising on the gift of a furnished holiday letting property (e.g. to an adult child, an unmarried partner, a trust or a company) made before 6th April 2010 can be held over (i.e. deferred so that no tax is due until a subsequent disposal by the transferee). Thereafter, the only way to hold over the gain arising on the gift of a furnished holiday letting property will be to transfer it into trust. This is often an effective way to pass on investment property free of tax but can have Inheritance Tax consequences.
Furnished holiday letting losses which are not relieved before 6th April 2010 will be carried forward and treated as if they were a normal rental loss arising in the year ending 5th April 2011. This means that such losses will only be eligible for set off against rental profits from UK properties (or from foreign properties if the furnished holiday letting property itself is located overseas) arising in 2010/11 or later years.
Future capital allowances will, however, be eligible for set off against other income of the same year. This means that purchases of new furnished holiday letting property, furniture and equipment by 5th April 2010 will produce future tax savings even when the furnished holiday letting business makes future losses.
Other points to note are:
- The renting of holiday accommodation continues to be a standard rated supply for VAT purposes
- The Inheritance Tax treatment is unchanged – properties only qualify for business property relief under limited circumstances
- Furnished holiday lets will qualify for the landlord’s energy saving allowance from 6th April 2010.. The allowance is not available under the current regime so it may be worth deferring insulation expenditure until after 5th April.