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Spring 2013

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Furnished Holiday Lets

moore scarrottCHARTERED ACCOUNTANTS

There has been a lot of uncertainty regarding tax relief for owners of Furnished Holiday Lets (FHLs) over recent years. Now that new rules are in place, it is a good time to check your lettings still qualify for special tax reliefs and consider tax planning opportunities.

BackgroundFHLs have enjoyed beneficial tax treatment for a number of years. In the 2009 Pre-Budget Report, it was intended that these advantages would be withdrawn from 2010/11. However, after much lobbying, the existing rules were retained with two main changes:

Increasing the number of days letFrom 6 April 2012, the tests became stricter with regard to the number of days your property needs to be available and the number of days it is commercially let:

The new conditions are much harder to meet and some owners with a seasonal trade or operating within a niche market may suffer. If you believe you may fail to meet the new qualifying conditions then we can assist you with considering your options. With careful planning, it may be possible to retain the tax beneficial FHL status.

Options include averaging the number of days let (if you have more than one FHL) or taking advantage of a “period of grace”.

Taking Advantage of New Opportunities

From New rule Implication

6 April 2011 FHL losses cannot be offset against your other income

Cash flow implications as you may pay tax on other income in years with a loss on your FHL

FHL losses will be carried forward to be used against future FHL profits

6 April 2012 Your property will need to be both available and occupied for more days than in the past

Two tax elections may assist. However, in the future, you may need to achieve more lettings to retain FHL status

Tax year 2011/12 2012/13

Available 140 days 210 daysCommercially let

70 days 105 days

Going forward it will be important to consider whether the lettings test can be met by existing demand or whether to increase marketing or special offers in light of what tax advantages FHL provide to you.

Exit strategyIf your FHL may not qualify under the stricter new rules you may wish to consider options such as:

• Gifting the property while it qualifies so that any gain can be “held over” and no Capital Gains Tax arises• Selling the property to achieve a potential 10% tax rate instead of 28%

What are the tax advantages of a FHL?Profits from properties that qualify as FHLs are treated as trades for some tax purposes and enjoy tax advantages over other let properties:• Entitlement to plant & machinery capital allowances on fixtures and furniture• Capital Gains Tax reliefs – the ability to rollover gains, holdover gains on disposal and the potential to qualify for a 10% tax rate on disposal• Profits count as earnings for pension purposes• Profits can be split between the owners by agreement each year

Accountants, Taxation and Business Development Specialistsmoorescarrott

Tax Relief for Fixtures in Furnished Holiday LetsMany owners claim allowances on the furniture included within the property, but miss out on substantial tax relief for fixtures such as hot water systems, electrical and lighting systems, bathroom equipment or kitchens. We can carry out a review to see whether any potential tax relief may have been missed, particularly on the original purchase of the property.

If you think this will not be worth pursuing due to the fixtures being old and having little current value, you may be surprised by the fact that many claims are based on the current replacement value of fixtures, which can be substantial.

For example, in a Furnished Holiday Let costing £500,000 there may be over £100,000 of fixtures qualifying for relief. A higher rate taxpayer may benefit from £40,000 of tax relief over the life of the claim.

There are also important changes to the rules on fixtures applicable to anyone considering buying or selling a Furnished Holiday Let, which have an important commercial impact.

• Tax Relief for Fixtures in Furnished Holiday Lets • Inheritance Tax Planning

Real Time InformationFrom April 2013 you will need to provide information to HMRC before you pay your employees.

This information will not only include details of their pay, but also the ‘normal’ number of hours worked.We can assist to ensure you are ready to cope with the new requirements.

Pension auto-enrolmentAll employers will soon be required to offer a qualifying workplace pension to eligible employees. This requirement is being phased in between now and February 2018.Further information is available at:www.thepensionsregulator.gov.uk/employers.

National Minimum WageNational Minimum Wage rates are changed from 1 October each year. The current rates, being the minimum you can pay employees, are as follows:

Age Per hour21 and over £6.1918 – 20 £4.98Under 18 £3.68

Payroll & Employment UpdateIf you employ staff, there are some important issues and forthcoming changes to be aware of

Inheritance Tax PlanningMany of us do not like to consider Inheritance Tax (IHT) planning and it is often a matter that is discussed far too late in life. As the owner of a Furnished Holiday Let (FHL) there is the potential for 100% relief from Inheritance Tax on your property provided that sufficient services are provided to qualify as a ‘business’.

Unfortunately, a recent tax case has made it very difficult to establish just what level of services will enable a FHL to qualify for business property relief in full. In brief, the Pawson case concerned a property which qualified as a FHL but was deemed by HM Revenue & Customs not to be a “business” as far as Inheritance Tax is concerned. At the First Tier Tribunal, HMRC lost their argument and, even though the owners provided a minimal level

From New rule Implication

6 April 2011 FHL losses cannot be offset against your other income

Cash flow implications as you may pay tax on other income in years with a loss on your FHL

FHL losses will be carried forward to be used against future FHL profits

6 April 2012 Your property will need to be both available and occupied for more days than in the past

Two tax elections may assist. However, in the future, you may need to achieve more lettings to retain FHL status

of services to holidaymakers, it was initially decided that it qualified as a business. However, the Upper Tribunal have now overturned that favourable decision.

It is likely that this case will go to the Court of Appeal but, for now, we are back to the question “Just how much does an owner have to provide in the way of services to qualify for 100% business property relief?”

At first glance, it would appear that very few properties will qualify. However, each case will be judged on its own merits. In the Pawson case the services comprised supply of bed linen which was arranged through a laundry service, the services of a cleaner between lets and the normal services such as TV, telephone and hot water. It remains our view that, in order to stand any chance of qualifying, a high level of interaction with the holidaymakers would be required.

We can offer advice on strengthening your tax position, in light of recent tax cases.

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Accountants, Taxation and Business Development Specialistsmoorescarrott

Marcus Longbottom FCA Partner

T: 07712 931993E: cmsl@moore-scarrott.co.uk

Marcus joined the partnership in 2007 having previously been a partner in a South Yorkshire practice.

He qualified in 1992 and become a fellow of the Institute in 2003. Marcus is the partner responsible for leisure and tourism and assists many individuals owning furnished holiday lets, hotels and bed & breakfasts.

Simon Tapp ACA FCCASenior Agricultural Manager

T: 01823 282100E: simon.tapp@moore-scarrott.co.uk

Qualifying as a Chartered Certified Accountant in 1999 and becoming a fellow of the Association in 2004, Simon has been with Moore Scarrott since 2005.

A farmer’s son from Mid Devon, Simon provides accounting, tax and business advice to smaller incorporated and non-incorporated businesses, owner managers and sole traders, including agricultural and rural based businesses.

Jemma Crane ACA CTATrusts & Estate Manager

T: 01823 282100E: jemma.crane@moore-scarrott.co.uk

Jemma joined the practice in 2010, after qualifying as a chartered tax advisor with a top 30 accountancy firm. She has successfully developed a specialism in servicing the varied accounting and tax requirements of landed estates, farmers and other clients within the rural, leisure and tourism sectors. Her work includes planning and minimising tax expenses for individuals and businesses.

www.moore-scarrott.co.uk

Calyx House, South Road, Taunton, Somerset, TA1 3DU T. 01823 282100 F. 01823 254396 E. info@moore-scarrott.co.ukThe content of this newsletter is for general information only. It should not be relied on and action which could affect your business should not be taken without appropriate professional advice.

Moore Scarrott is the trading name of The Moore Scarrott Partnership LLP, a Limited Liability Partnership, registered in England & Wales No. OC329196.Registered Office: Calyx House, South Road, Taunton, Somerset, TA1 3DU. Regulated for a range of investment business activities by the Association of Chartered Certified Accountants.

If you do not wish to receive future copies of this publication please contact Martha Harley at martha.harley@moore-scarrott.co.uk