A tax muddle has opened an unusual window of opportunity for holiday homes.
In the week in which European political history is made, much to the chagrin of the UK ruling party, is it too much salt in the wound to examine how EU law, or the threat of EU intervention has created a tax muddle around Furnished Holiday Lettings?
The way things were
Furnished Holiday Lettings (FHL) were certain types of holiday properties let out to short-term visitors. If the letting of a property qualified as a FHL, it was treated as if it were a normal trade, rather than a property business. As a result, FHLs benefited from the wider use of trading losses, and the availability of certain capital gains reliefs not normally available on rental properties, the most notable of which was business asset taper relief (now repealed).
In order to qualify, the property must be furnished accommodation, let on a commercial basis with the view to making a profit. The property must be available for letting and actually let for statutory minimum periods in any twelve months, and there should not be a continuous period of letting exceeding 31 days to the same person, not even if packing off the mother-in-law, in any seven-month period.
Until Budget 2009, there was also a requirement that the property be situated in the UK.
The Budget 2009 changes
In the months leading up to the Budget, a number of tax cases had been heard in Europe that had required the UK to change its own internal tax laws in order to be EU compliant. Two specific cases concerned the inheritance tax reliefs of Agricultural Property Relief and Woodlands relief. Both reliefs statutorily applied only to the UK/ UK and its islands, and both were held to be contrary to the EU aim of ensuring free movement across the European Economic Area (EEA).
Having seen the writing on the wall as far as FHL were concerned, the Government decided to change the law as it applies to FHL as a pre-emptive measure. However, the result is far from what could have been anticipated.
With effect from Budget Day (22 April 2009), properties meeting all other requirements will qualify as FHL if they are situated anywhere in the EEA. So far so good. However, the beneficial FHL rules will then be repealed in their entirety for all properties, UK or EEA, with effect from 6 April 2010. Sledgehammer to crack a nut anyone?
An unusual window of opportunity
It has been suggested that the original plan was to simply repeal the legislation, but given the late Budget, i.e. after the 2009/10 tax year had started, the Government felt compelled to relax the rules to include EEA properties only until they could legitimately get rid of the whole thing.
What this does, however, is create a unique tax planning opportunity out of a big muddle. Any taxpayer affected by the inclusion of EEA properties in the definition of FHL may go back an amend earlier years' returns or claims provided they are within the time limits to do so.
This means that anyone wishing to utilise losses under the more advantageous FHL rules can amend their income tax returns for 2007/08 within the 21 month limit. For individuals and trusts, 2006/07 tax returns may also be amended, even though they are outside the amendment period (which closed on 31 January 2009) provided amendments are made by 31 July 2009. A similar extension applies to company tax returns such that accounting periods back to 31 December 2006 may also be amended.
For those wishing to claim certain capital gains tax reliefs, where a six year time limit applies, returns can be amended back to 2003/04. Where there is no statutory time limit for claims, such as for taper relief, the six year limit will also apply.
Whilst anyone affected should seek personal advice on how the changes may affect their particular circumstances, it is clear that there may be scope for considerable tax savings, albeit within a very short window of opportunity. Take taper relief, for example -- anyone who sold a property in the EEA that would have qualified for FHL between 6 April 2003 and 5 April 2008 is likely to have achieved a minimum capital gains tax rate of 24%, assuming maximum non-business asset taper relief is available. If this becomes business asset taper under the FHL rules, the minimum tax rate falls to 10%, giving a potential tax repayment of up to 14%.
The future?
The repealing of the rules in order to thwart a potential EU challenge could be seen as a big raspberry being blown at Brussels. But are the Government simply cutting off their nose to spite their face?
Although now non-EU discriminatory, the lack of tax advantage when buying holiday properties may discourage people from buying. Similarly, those who currently hold such properties, which will qualify for entrepreneur's relief from capital gains may decide to sell before the new rules take effect, albeit it at a lower price, and generating a lower tax bill. A dearth of buyers and an influx of sellers is hardly likely to put the bounce back in to the property market.
UKIP must be pleased.
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