Government to withdraw beneficial furnished holiday letting rules

Budget small print reveals repeal of Furnished Holiday Letting rules from April 2010

In a Technical Note from HM Revenue & Customs to accompany the Budget statement, the Government has revealed that it is to repeal the Furnished Holiday Lettings (FHL) Rules from April 2010, according to chartered accountants and business advisers MacIntyre Hudson. The Government has recognised that the current rules - which only apply to property in the UK and not across Europe - are incompatible with European law, and have therefore taken the decision to remove them all together, rather than expand them for property across the EEA.

Until the rules are repealed next year, the Government is allowing those with qualifying FHL property in the EEA to make claims for FHL reliefs in their tax returns.

In general, the letting of property is treated as a property investment business and not as a trade. However, under the FHL Rules, landlords of furnished holiday properties in the UK can, subject to certain conditions, obtain some of the more favourable tax treatments available to traders (such as loss relief, capital allowances, capital gains tax reliefs, and relevant earnings treatment for pension purposes).

Patrick King, Tax Principal at MacIntyre Hudson, the accountancy firm, comments:

ìThis was an all or nothing case for the Government. Under European law it needed to apply the rules to properties across the European Economic Area or not at all. The Government has decided to repeal the rules rather than extend them across Europe.

ìOn the plus side, the rules are first to be extended to Europe before abolition, creating a window of opportunity for some as the legislation will not be repealed until April 2010 – in the meantime, not only will holiday home landlords with properties elsewhere in the EEA be able to claim tax benefits in 2009/2010, but these same landlords will be able to claim benefits in arrears back to 2006/2007, as long as adjustments are made to their tax returns before 31 July 2009.

ìYet this will be of scant comfort in view of the impending repeal of the rules, which provide critical tax breaks for the majority of landlords with FHL properties in the UK, who for all intents and purposes are running a business. While the Government has lectured rural communities on the need to diversify their income streams, it is now punishing one of the most common means of doing this available. What makes it all the more galling is that this is clearly a backhanded attempt to weasel out of EU obligations and in the process raise additional revenue. It is certainly difficult to see from what angle this proposal is ìfairî, or helps the communities that the Government purports to championî