Tread carefully over furnished holiday lets

Farmers with let holiday cottages can breathe a sigh of relief that the government is to leave special tax rules in place. But tax treatment of these diversified enterprises is still complicated, warns accountant Saffery Champness.

Although the rules on Furnished Holiday Lettings (FHLs) were expected to change last year, they will continue to be treated as a business activity that benefits from favourable Capital Gains Tax treatment.

FHL properties are treated as business assets when being disposed of, meaning that the gain on the disposal can either be “rolled over” against the acquisition of replacement assets, or they can benefit from Entrepreneur’s Relief – reducing the CGT rate to 10%.

The major change this year is that there will no longer be an option of setting FHL losses off against general income – losses will only be available to be carried forward against FHL profits in future years.

Capital allowances will still be available after April 2011, but the timing of any capital expenditure can help you maximise the offset of losses.

In 2012, changes will be made to the criteria for what qualifies as a Furnished Holiday Let. The property will have to be rented out for 105 days a year, as opposed to the current threshold of 70 and available to let to the public for 210 days; previously it was140.

Alison Robinson of Saffery Champness Landed Estates and Rural Business Group said: “FHLs have proven to be a lucrative and tax-efficient investment for buyers over the years, so the decision to abandon the plans to scrap their special tax rules should be welcomed. However, there are some significant changes to the rules coming into effect in April 2011 – the most important of which is the government’s decision to allow offset of FHL losses against future FHL profits only rather than all types of personal income as has been the case historically.

“Remember that the old rules still apply this year, however, and you can benefit from tax relief on any losses incurred this tax year, offsetting them against all other types of personal income over the same period. You should consider the timing of capital expenditure such as refurbishments, as this may allow you to maximise loss offset.

“It is also worth remembering that the criteria for FHLs will be changing in 2012: occupational requirements are going up and a property must now be rented out for 105 days a year to qualify (previously 70) and available to the public for 210 days (previously 140). This makes it more difficult to qualify as an FHL, and you should be aware of it if you wish to continue to take advantage of the generous FHL tax regime.”

Are you, like many other farms, missing out on tax claims for R&D?

If you’re a limited company, you could be eligible for tax credits if you’re carrying out R&D on your farm. For more information and to find out if you’re eligible visit our R&D tax credits page.

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