3 Mins
Budget Update
Furnished Holiday Lets
Important notes
Budget Update
Following the recent financial changes, we now have Prime Minister Rishi Sunak and Jeremy Hunt as Chancellor. One of their first announcements has been to delay the Autumn OBR update to the 17th of November and upgrade this to a full Autumn statement.
Will we need to wait until then for any tax or financial changes or will there be some announcements before that?
Will the timing of the UK Autumn statement alter the plans for the Scottish Budget?
The Scottish budget was originally set for the 15th of December so this may remain or be pushed back a few days.
We will be keeping a very close eye on both announcements, especially for any changes to tax and we will keep you updated on how any changes may affect you.
Furnished Holiday Lets
With continued issues at airports and with ferries since the relaxation of Covid restrictions and the effects of Brexit, holidaying in the UK is becoming more popular. This is met with an increase in the number of properties available as furnished holiday lets (‘FHL’). If you have an FHL, what does this mean for tax?
FHLs are classed differently from standard rental property and there are some significant tax advantages for qualifying properties.
To qualify as an FHL, the following conditions must to be met:
• The property must be fully furnished.
• The FHL must be located in the UK or in any other state within the European Economic Area. Please note any overseas lets are treated as a separate business to a UK let.
• In a 12-month period, usually the tax year, the FHL must be available commercially to let for at least 210 days.
• Also, within that 12-month period the accommodation must have been actually let for at least 105 days
• Should any let be greater than 31 days, this is considered a long-term let and would not normally qualify as part of the 105-day rule. Additionally, should the total number of long-term let days exceed 155, the property will not be classed as an FHL.
These conditions need to be met each year to continue as an FHL. Should they not be met in a relevant 12-month period, a year of grace election can be made. This may be useful if significant renovation has taken place, though a property will cease to be regarded as an FHL if conditions continue to no longer be met.
Should a property business include two or more FHL’s, the letting days condition can be averaged. For example, FHL one is let for 120 days and FHL two is only let for 100 days. They can be averaged so both will be deemed as being let for 110 days and both qualify.
Tax advantages
Should the above conditions be satisfied, then some tax advantages can be gained.
For standard rental property, mortgage interest is only given relief as a tax reducer of 20%. Under FHL rules, the full amount of mortgage interest can be deducted from the rental income.
Profits from and FHL business are treated as earned income. As the ability to make pension contributions are based on your level of earnings, this could give individuals the ability to put more into a pension.
If the FHL business income is less than £150,000 and the cash basis is used (recording income when it is received and expenditure when it is paid), any capital expenditure on fixtures and fittings/furniture can be deducted when calculating taxable profits. Alternatively, if the accruals basis is used (recording income when it is earned and expenditure when it is incurred), then capital allowances can be claimed instead.
Arguably the biggest advantage is from the Capital Gains Tax (‘CGT’) perspective. An FHL is eligible for gift relief should and individual wish to gift an FHL, rollover relief if an FHL business is sold and new assets purchased, and also for Business Asset Disposal Relief (‘BADR’).
BADR allows the seller of an FHL to be taxed on any gains at the CGT rate of 10% (subject to the lifetime limit of £1 million). This compares to the standard residential property rates of 18% for basic rate taxpayers and 28% for higher/additional rate taxpayers. Generally, if the property is held for at least two years, and has been an FHL for the entire period, then BADR will be available.
Important notes
TAX RETURNS – The tax return deadline of 31 January is approaching fast, make sure you hand in your tax return information as soon as possible.
FRAUD ALERT – We have seen a recent rise in the number of letters, emails and calls pretending to be from HMRC chasing up an outstanding debt. If you get one of these and are not sure if it is genuine or not, please contact us and we can help you check. Please never make a payment unless you are certain it is due and being paid to the correct place.
BASIS PERIOD REFORM – Further to our previous articles, basis period reform is approaching quickly so it is important to be starting now to consider and discuss how this will affect your business.
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