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Act now to save Tax!
The current tax rules for qualifying Furnished Holiday Lettings (FHL) are very favourable. From 5 April 2010 these rules will be abolished and for many property owners now is the time to act.
So what are the tax changes from 6 April 2010?
Income Tax changes
o Losses incurred will only be set against other rental income rather than all income.
o Profits will no longer be treated as earnings for pension contribution purposes.
o Stricter rules will apply where profit sharing does not tie up with ownership of the property. This is most relevant to married couples.
o Capital allowance claims will be replaced by the wear and tear allowance on furniture and furnishings.
1) For those planning repairs to a FHL it may be beneficial to get these done before 6 April 2010. The repairs could create a tax loss, which will reduce a tax liability or generate a repayment. Any loss can be set off against other taxable income arising in the same tax year, or the previous year. Losses arising in tax years 2008/2009 and 2009/2010 may also be carried back to the previous three years (with a limit of £50,000 on losses arising in each year).
2) Capital Allowances will no longer be available from 6th April 2010. Capital Allowances are tax allowances on certain types of capital expenditure. These are items such as washing machines, kitchen equipment, bathroom and sanitary wear, central heating, furniture, furnishings and insulation, which will qualify for either Plant & Machinery allowances or Integral Features allowances. The first £50,000 of expenditure each year qualifying for Capital Allowances obtains the “Annual Investment Allowance” and a 100% tax write off.
3) Currently the FHL profits or losses do not necessarily have to follow the ownership of the property. This can have tax benefits. Profits can be taxed at lower rates when co-owners or spouses suffer tax at differing rates. From 6 April 2010 a FHL will be taxed as rental income, which will follow ownership. For some property owners a transfer of ownership between spouses may be beneficial where one spouse is a higher rate tax payer, or one has no other taxable income and personal allowances are unused.
Capital Gains Tax
The main changes from 6 April 2010:
o Holdover relief will no longer be available on a gift of the property. Currently a FHL can be gifted and any Capital Gain “held over”.
o Rollover Relief will no longer be available for FHL. There is a list of qualifying assets that benefit from Rollover Relief. This list contains property and land used in a trading business, and until now FHL were included. The tax advantage is that a gain realised on sale of a qualifying asset could be “rolled into” the purchase of another qualifying asset within a time limit. For example provided all the rules were met business premises could be sold and the gain rolled over in the purchase of a FHL. Alternatively up until 5 April 2010 a FHL could be sold and the gain rolled over into another FHL or qualifying business asset.
o Gains realised on FHL sale will no longer qualify for Entrepreneurs' Relief and the effective 10% tax rate it brings. After 5 April 2010 the Capital Gains Tax rate on FHL will be the flat rate of 18%.
Properties which have been owned for a long period may be sitting with a large potential Capital Gain should the house ever be sold or gifted. If the intention is to gift a property to an adult family member then consider gifting pre 6th April 2010. Up until then a holdover claim can be made by the donor and the recipient. This effectively defers any Capital Gain Tax liability that would ordinarily occur. The recipient of the gift adopts the original tax cost of the donor. From 6th April 2010 this valuable relief will be lost to FHL and Capital Gains Tax will be payable without relief.
In some circumstances a gift can allow a tax free sale of a Holiday Home.
Consider this example:
Andy has a flat in Edinburgh that has been let out as a furnished holiday accommodation for many years. The flat now stands at a substantial capital gain. He gifts the flat to his adult daughter Ellie and both elect to holdover the capital gain. Ellie can elect for the property to be regarded as her main residence for Capital Gains Purposes. The election for the Edinburgh flat to be her main residence does not need to last long, which would be relevant where Ellie owns another property. The Edinburgh flat could be sold at any time within the three years of the gift and be exempt from Capital Gains Tax.
For further information on any of the above contact Andrew Ritchie, Campbell Dallas on 01738 441888 or email@example.com.