FWIW this is a post I made on another forum.
I've also received a summary produced by an accountancy firm on behalf of Cumbria Tourism; I don't propose to post it here, but if anyone is interested PM me and I'll send you a copy.
As various somnolent bodies associated with the self catering industry gradually wipe the sleep from their eyes (and please note this comment is not aimed at the likes of EASCO and those who've been active from the incept of the FHL Tax changes) there seems to be a little more information crawling out on the effects of the proposal for FHL Tax changes, if indeed these become law.
I am neither accountant nor lawyer, and most definitely not a politician, so anything I say may be completely misguided, as it is merely gleaned from reading endless gobbledygook from HMRC, and some pithier information from some advisory and accountancy bodies. I'd be very interested to hear from anyone who has more facts on anything that follows.
A summary of the change seems to be that FHL will not be seen as a trading business (whatever that means in HMRC speak) but treated in the same manner as property investment. There will be significant impact on Inheritance Tax (IHT) and Capital Gains Tax (CGT), although presumably they only have an effect if you are looking to sell your properties, or die.
The changes affecting the running of the business are perhaps more relevant, and as far as I can work out we can all wave goodbye to capital allowances for equipment, furniture etc and instead we'll get a Wear and Tear allowance of 10% of income. That may or may not be a significant change, but it suggests that any significant capital items should, if funds allow, be purchased before 6th April 2010.
Those seeking to start up in the business are apparently going to be hit hard by the changes; we all know that starting from scratch is a hugely expensive undertaking, with a lot of up front expenditure to ensure the building meets requirements, fittings and furnishing. So we may well see considerably less people going into the business in the future.
An "interesting" change is that losses from running the business will no longer be able to be offset against other income. Now this may not necessarily be a bad thing (ducks). Those of us who take the business seriously are not looking to make a loss on an ongoing basis (losses are likely in the first couple of years, but these can be rolled forward - I think - to offset profits in subsequent years.) Indeed, for some of us it is our sole income. The owners who will be hit hardest by this change are those who have a property that they choose to let as FHL purely because of the current tax breaks; ie they seek to make a trading loss that they can offset against their other income, whilst maintaining subsidised ownership of a second home or investment property - although "investment" and "property" don't sit as comfortably together as was the case. One way they achieve this is to let the property and unrealistically low rates; enough to cover some outgoings, but not to make a profit. Providing a FHL in this manner seriously distorts the market, and affects the expectations of potential holidaymakers, adding to the misconception that self catering is all about putting up with cheap tat and indifference.
The tax changes could take a lot of those properties off the FHL rental market, and there are obvious potential benefits to the rest of us who do take the business seriously. However, it will reduce the choice for Customers, and it would be unfortunate if it also resulted in the loss of properties with caring owners if their margins no longer seemed worth the hassle of offering a FHL, and decided to go down the very much simpler route of 6 month lets instead.
One final thought - does anyone know if the changes would affect the existing rules on the maximum period (31 days?) that a FHL can be rented to the same person?
I've obviously generalised in the above, my assumptions may be wrong, but I offer it up as food for thought!
Further, this is the response I received from Jenni Rich, who is the co-ordinator at HMRC for any comments and feedback.
Her email address, which is given incorrectly on the Government papers, is
jenni.rich@hmrc.gsi.gov.uk
Thank you for your email below, I appreciate you taking the time to write to me.
I note your concerns about FHL properties that are restricted in their use because of planning regulations. I also note your concerns that FHL will be treated as a property letting business and not a trading business.
The separation of property income from trading income is a long established principle of UK tax law. The distinction can in some cases be narrow and will depend on a number of factors, but in the past the courts have decided that in general, letting furnished accommodation (including holiday accommodation) is a property business.
Characterising a business as a property business does not imply that the income derived from it is "passive". I accept that FHL business owners have to put considerable investment and effort into setting up and running their businesses. The mere fact that an owner of FHL business will spend a lot of time on his/her property business, perhaps even all their working time, does not convert rental income into trading income. I think it is common ground that those commercially letting furnished holiday accommodation have a genuine business activity, but not all business activity is trading.
On the 9 December HMRC published guidance about the tax treatment of those who let furnished holiday accommodation following the withdrawal of the FHL rules. The guidance explains in further detail the difference between a property business and a trading business. This guidance can be found on our website at
www.hmrc.gov.uk/pbr2009/withdrawing-let ... s-3760.pdf.
Regards
Jenni Rich
Policy Advisor (Trading and Property Income Team)
CT&VAT
HMRC
Tel. 020 7147 0686
100 Parliament Street, London, SW1A 2BQ
