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Landlords with income from furnished holiday accommodation in the UK  are currently treated as if they are trading for certain tax purposes, as long as they satisfy certain tests, under the Furnished Holiday Lettings (FHL) rules. Landlords with income from furnished holiday accommodation elsewhere in the European Economic Area (EEA) cannot currently qualify for this treatment. They were treated instead in the same way as landlords of other types of overseas property, under the property income rules. The Government has decided it should repeal the FHL rules from 2010-2011 so as to be compliant with European law. Until the FHL rules are repealed, HMRC will regard the FHL rules as applying to furnished holiday accommodation elsewhere in the EEA. The change in treatment for furnished holiday accommodation in the EEA is explained in more detail below. 

What has changed?

Until now the FHL rules have only applied to furnished holiday accommodation situated in the UK. HMRC will now treat the FHL rules as including furnished holiday accommodation elsewhere in the EEA. Therefore, if an EEA property satisfies all the other qualifying conditions, it will be a qualifying FHL property for tax purposes. 

Who is likely to be affected?

Individuals, partnerships and companies who let furnished holiday property situated within the EEA (but outside the UK), and who are liable to UK tax on the income and capital gains from the property. 

What are the Furnished Holiday Lettings (FHL) rules?

The letting of property is not a trade The Furnished Holiday Lettings rules allow landlords of furnished holiday properties, which satisfy certain conditions, some of the tax treatments available to traders. Under the FHL rules, landlords are treated as though their qualifying FHL business is a trade for the following purposes:

Loss relief.

Capital allowances.

Landlords Energy Saving Allowance (LESA)

Certain capital gains reliefs.

Relevant earnings when calculating the maximum relief due for an individual’s pension contributions. 

Qualifying conditions.

The conditions which must be met in order to qualify for the tax treatment provided under the FHL rules are as follows:

The property must be situated in the EEA.

The business must be carried on commercially, and with a view to a profit.

Availability: the property must be available for commercial letting as a holiday accommodation to the public for at least 140 days during the relevant 12 month period.

Letting: the property must be commercially let as holiday accommodation to members of the public for at least 70 days during the relevant 12 month period. (Note: a letting for a period of longer term occupation is not a letting as holiday accommodation for the purpose of the letting condition.)

Pattern of occupation: not more than 155 days must fall during periods of longer term occupation. (Note: A period of longer term occupation is a continuous period of more than 31 days during which the accommodation is let to the same person.) For individuals with a continuing FHL business, the relevant 12 month period will be the tax year to 5 April. Where the qualifying conditions are not met during the relevant period, the FHL rules do not apply and the normal rules on overseas property income will apply for that tax year or accounting period. 

Time Limits.

HMRC will accept any claims for relief or requests for FHL treatment to apply as long as:

the claim or request is for one of the reliefs or other treatments available under the FHL rules.

the claim or request relates to a property situated in a country within the EEA during the relevant period.

the letting meets all the requirements of the FHL rules, apart from being situated outside the UK.

where a claim or amendment of a return is required, it is made within the normal time limits for making such a claim or amending the return. The normal time limits for amending income tax returns is 1 year after the 31st January after the end of the tax year to which the return relates. The normal time limit for amending corporation tax returns is generally 2 years after the end of the accounting period to which the return relates. If you cannot amend your return, but are still within the normal time limits for making the claim in question, you may do so by writing to your local tax office. This may apply to claims for hold over relief, roll over relief, relief for losses carried forward, terminal loss relief. 

Repeal of the FHL rules.

The Furnished Holiday Letting rules will be repealed from 2010-2011. This will affect properties situated in the UK and those situated elsewhere in the EEA.

Article Courtesy of Stephen Brownlee @ SDB Accountancy Services