In the 2010 post election budget it was confirmed that the previously agreed abolition of Furnished Holiday Lettings (FHL) would not take place and the FHL rules will continue for 2010/11.

What is FHL

Holiday lettings are generally taxed under the property income rules however, the Furnished Holiday Lettings (FHL) rules allow holiday lettings of UK properties, and properties situated in the European Economic Area (EEA), that meet certain conditions to be treated as a trade for some specific tax purposes.

What’s the difference

Different tax rules apply to income from letting property and income from trading. Income from letting property, including holiday lettings, is normally taxed under the property income rules. However, the FHL rules allow holiday lettings that meet certain conditions to be treated as a trade for the following tax purposes:

• loss relief;
• capital allowances;
• Landlords Energy Saving Allowance (LESA);
• certain capital gains reliefs (including business asset roll-over relief, entrepreneurs’ relief, relief for gifts of business assets, relief for loans to traders and exemptions for disposals of shares by companies with a substantial shareholding); and
• relevant UK earnings when calculating the maximum relief due for an individual’s pension contributions.

Conditions of the FHL rules

Certain conditions must be met in order to qualify for the tax treatment provided under the current FHL rules:

1. the property must be situated in the UK or EEA;

2. the business must be carried on commercially, and with a view to a profit;

3. Pattern of occupation: Total periods of longer term occupation must not exceed 155 days during the relevant period. A period of longer term occupation is a letting to the same person for longer than 31 continuous days;

4. Availability: the property must be available for commercial letting as holiday accommodation to the public for at least 140 days during the relevant period; and

5. Letting: the property must be commercially let as holiday accommodation to members of the public for at least 70 days during the relevant period. A letting for a period of longer term occupation is not a letting as holiday accommodation for the purposes of this condition.

If you let a property that is situated outside the UK but within the EEA, which otherwise satisfies the FHL qualifying conditions above, you can choose whether to be taxed under the FHL rules or under the normal rules for property businesses. However, you cannot pick and choose which of the FHL rules apply.

Likely changes

The Government is looking to introduce changes to the FHL rules from 6 April 2011 (1 April 2011 for companies). The proposed changes would:

• Ensure the FHL rules apply equally to properties in the EEA;
• Increase the number of days that qualifying properties have to be available for, and actually let as, commercial holiday letting; and
• Change the way in which FHL loss relief is given.

Full details about the proposed changes will be published over the summer, for consultation.

Please contact us for more information or if you have any questions.