Furnished Holiday Accommodation Tax Breaks
There are several tax breaks associated with FHA. Losses on the lettings can be set off against any other income (whereas losses on any other lettings can only be set against other letting profits in the same or a subsequent tax year), and capital allowances can be claimed on plant and machinery (such as TV sets, fridges, and furniture).
For capital gains tax the property is treated as a trading asset which means that gains on other assets used in a trade can be rolled over into it, thus deferring the tax until the replacement asset is sold. It is also possible to hold over the deemed gain that would arise if the property was gifted to another person. Entrepreneur’s relief can reduce the effective rate of CGT on the disposal of FHA to 10% if it is sold.
All of these reliefs are to be abolished from 5 April 2010, but it appears that a quirk in the law means that it would be possible to buy a property between now and 5 April 2010 and to claim rollover relief on it for capital gains tax. The reason lies in the way FHA is defined for tax purposes, ie as property let as furnished residential accommodation on a short term basis (no more than 31 days to the same occupant) for at least ten weeks during the year and available for such letting for at least twenty weeks during that year. When not let as FHA, it must not be occupied on longer-term lets for more than 155 days of the year.
In a continuing business, these tests are applied to the tax year (year to 5 April) in the case of an individual landlord, or to the accounting period of a corporate landlord. In the first year in which the property is let, however, they are applied to the twelve month period beginning with the first day of the first letting of the property.
To take an example which cuts things as fine as possible, imagine the case of William Doors, who sold his small software business on 1 April 2007, receiving £400,000 for the goodwill. On 1 February 2010, he buys two cottages for £400,000, and quickly refurbishes and furnishes them for letting as furnished accommodation (claiming capital allowances on all the furniture and much of the refurbishment).
Provided he can get a tenant into each cottage by 5 April 2010, and he follows the rules above on the timing of tenancies for the first 12 months after the first tenant moves into each cottage, he can claim to roll over the gain on his software goodwill. He has bought the cottages within the time limit for a rollover (three years after the sale of goodwill), and they will have qualified as FHA before 5 April 2010.
Even if William has yet to sell the software goodwill, provided he acquires the cottages as described above, he still has a year from 1 February 2010 to dispose of the goodwill and roll over the gain into the cottages. Once the twelve months from the start of the first letting has passed, he can revert to letting the cottages on normal tenancies if he wishes.
If you purchase a property and let it before 5 April 2010, therefore, provided that you stick to the above rules for the twelve months beginning with the first letting, it will qualify as FHA for 2009/10. This means that you could roll over a capital gain on the sale of another business asset in the period beginning three years before you purchase the FHA property, and ending one year after that purchase.