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Furnished Holiday Lettings

The furnished holiday let (FHL) rules allow holiday lettings of properties that meet certain conditions to be treated as a trade for specific tax purposes. This begs the question, how can commercial property owners benefit from having a FHL?

Individuals, partnerships, trustees and companies who let furnished holiday accommodation situated within the UK or elsewhere in the EEA can highly benefit from having a FHL. HMRC recently changed their guidance on the scheme. Landlords of furnished holiday lettings are not affected by the new rules introduced this tax year that are gradually restricting tax relief on mortgage costs for residential properties to the basic rate of tax. This increases the tax benefit of the scheme, allowing owners to claim back a substantial amount of allowances on embedded items within the property.

In order to qualify as a furnished holiday letting, you must meet the following criteria:

  • Your property must be let on a commercial basis with a view to the realisation of profits.
  • Second homes or properties that are only let occasionally or to family and friends do not qualify.
  • Your property must be located in the UK, or in a country within the EEA.
  • Your property must be available for commercial letting at commercial rates for at least 30 weeks (210 days) per year.
  • Your property must be let for at least 15 weeks (105 days) per year and home owners should be able to demonstrate the income from these lettings.
  • Your property must not be used for more than 155 days for longer term occupation (i.e. a continuous period of more than 31 days).

Where there are a number of furnished holiday letting properties in a business, it is possible to average the days of lettings for the purposes of qualifying for the 15 weeks threshold.

There is a special period of grace election which allows homeowners to treat a year as a qualifying year for the purposes of the furnished holiday let rules where they genuinely intended to meet the occupancy threshold but were unable to do so subject to a number of qualifying conditions. Where the qualifying conditions are not met during the relevant period, the furnished holiday letting rules do not apply for that tax year or accounting period. In that situation, the normal property income rules will apply for that tax year or accounting period.

To identify whether your holiday let can qualify for a claim, get in touch with one of our specialists to arrange a free consultation.

 

 

 

 

Under-used holiday accommodation and elections

The festive period is a good time for your clients to boost the income from holiday properties. If these qualify as furnished holiday lets, they attract favourable tax treatment, but how can you advise clients that fall just short of the qualifying conditions?

TAX ADVANTAGES

Where properties are let out as qualifying furnished holiday lettings (FHLs), a number of favourable tax treatments apply. All commercial FHLs of UK accommodation are treated as a single trade for most income tax or all corporation tax (CT) purposes, as applicable.

Similarly, all their FHL activities elsewhere in the EEA are treated as a single trade, but with a number of restrictions. Note. For income tax, any FHL loss can’t be set against general income; it can only be carried forward against future income from the same business.

FHLs are also treated as a trade for CGT or, if applicable, CT on chargeable gains. This applies for rollover relief on replacement business assets, gifts of business assets, relief for loans to traders, entrepreneurs’ relief (ER) and the substantial shareholdings exemption. Note. It doesn’t apply for EIS deferral relief.

QUALIFYING

To be classed as an FHL (and secure these tax breaks), a number of conditions need to be met. Accommodation doesn’t qualify unless, throughout the tax year or an alternative defined twelve-month period:

  • in aggregate, periods of longer-term occupation- meaning continuous periods of more than 31 days during which the accommodation is in the same occupation (unless the circumstances are “exceptional”)- do not exceed 155 days (the pattern of occupation condition).
  • it is available for commercial letting to the public generally as holiday accommodation for at least 210 days (the availability condition); and
  • it is commercially let as holiday accommodation to members of the public for at least 105 days, excluding periods of longer-term occupation as defined above (the letting condition).

Pro advice. If a property qualifies as a FHL for a year, the full income from letting it qualifies as part of the deemed trade, including income from non-holiday lettings such as unprofitable off-season lets.

In practice it often transpires that despite your clients’ best efforts, the letting condition of 105 days is not met for a particular year. In these circumstances there are two elections that might help to preserve the FHL status, and therefore the beneficial tax treatments.

AVERAGING ELECTION

The averaging election may be used where the FHL property business in a particular year includes at least one qualifying FHL and one or more properties that would qualify but for their failure to meet the letting condition.

Your clients may elect to apply the letting condition for that year to all properties specified in their election as though each had achieved the average rate of occupancy for those properties. A qualifying property may not be specified in more than one election for a year.

Pro advice 1. Your clients may only average across properties in one FHL business. They can’t mix UK and EEA FHL properties together.

Pro advice 2. HMRC guidelines suggests than an averaging election must apply to all properties let within the FHL business. This is incorrect- properties can be averaged selectively.

PERIOD OF GRACE ELECTION

A property may qualify as a FHL in Year 1 (either in fact or as a result of averaging) but then fail to meet the letting condition in Year 2, even though the occupation and availability conditions are still met. In such circumstances a period of grace election may be made in respect of the under-used accommodation.

Your client must have had a genuine intention to let the property in Year 2. HMRC might want evidence that the property was marketed to the same or a greater level than in successful years, or that lets were cancelled due to unforeseen circumstances such as extreme weather.

If the property again fails to meet the letting condition in Year 3, they can make a second period of grace election (as long as they made such an election for Year 2).

If the property still fails to reach the threshold by Year 4, after two consecutive periods of grace, it won’t qualify as a FHL in Year 4 unless brought in by averaging.

Pro advice. An averaging and period of grace election can be made in respect of the same year (see case study below).

An averaging or period of grace election must be made by the first anniversary of the normal filing date for income tax, or within two years of the end of the accounting period for CT.

CASE STUDY

Tom acquires his FHL business on 6 April 2014. It consists of three actively marketed holiday properties which meet the pattern of occupation and availability condition from 6 April 2014 until the business is sold on 5 April 2018.

Unexpectedly, one property (C) was difficult to let in 2015/16 and 2016/17 because of oil pollution on local beaches.

Each year the qualifying periods of holiday letting (in days) amount in aggregate to:

A B C
2014/15 120 100 100
2015/16 110 100 30
2016/17 120 95 50
2017/18 120 100 95

If no elections are made, only A meets the letting condition in each year. On the sale on 5 April 2018, A is treated as a single FHL trade qualifying for ER (CGT rate 10%). B and C are taxed as residential properties (CGT rate 28%). Tom can resolve this by doing the following.

2014/15. By electing to average A, B and C, all properties meet the letting condition.

2015/16. By electing to average A, B and C, all properties meet the letting condition.

2016/17. By electing to average A and B, both properties meet the letting condition. By a second period of grace election, C meets the letting condition.

2017/18. By electing to average A, B and C, all properties meet the letting condition.

If the suggested elections are made, all three properties have met the letting condition throughout, even though B and C were never let for as many as 105 days. On the sale, all three properties are together treated as a single FHL trade for ER purposes (CGT rate 10%).

ADVISING

There are significant income tax, CT and CGT advantages to be obtained by ensuring that FHLs qualify. If your clients’ property fails to meet the letting condition, always do an exercise to see if an election can be made.

Pro advice. Averaging can be particularly useful where a holiday property business includes some properties on which high occupancy levels can easily be achieved and others where meeting the letting condition presents more of a challenge.

Despite the HMRC guidance being incorrect on the averaging point (as discussed above), is still a useful reference point when considering the elections.

Your clients’ qualifying status could be preserved by using either an averaging or period of grace election- or even both concurrently. These allow a non-qualifying property to be deemed as qualifying for a particular year, providing certain conditions, such as genuine intention to meet the letting condition- are met.

Why Hotels can claim so much in Embedded Capital Allowances

We work with people from many sectors so we thought we would look at a specific sector to show how effective and in some cases business changing it can be to conduct an Embedded Capital Allowances review of the commercial property involved in the business. Of all the highly effective areas we can look at, hotels is probably the absolute pinnacle of potential due to the nature of the property used in such a business.

Embedded Capital Allowances are applicable to a host of fixtures and fittings embedded within a building when it is purchased and/or added after purchase. Items such as lifts, radiators, heating systems, cold water systems, air conditioning, suspended ceilings, bathrooms, kitchens, security systems and fire alarms. These represent just a few examples of items that are frequently part of a building when its purchased and included in an overall price paid for the building. They are also typical of things that are included in any refurbishment, improvement or extension that may be done after the initial purchase.  All of these things (and more) attract significant relief under the terms of the 2001 Finance Act but are rarely claimed because it is complex and requires a specialist team to identify and quantify the amounts that can be claimed. Those amounts are considerable with hotels frequently achieving over 30% of the original purchase price identified as relating to claimable items. So if you paid £500K for your hotel you have the potential of a £150K claim.

All of that is done on a contingent basis so you pay nothing until the work is done and only then a small percentage of the amount identified as allowances and subsequently accepted by HMRC. A safe and effective way to put cash back into the business now and in the future.

Does it work? Can Headley Meredith Associates really deliver on these promises?

Here is a quotation from a client we work with who is also an accountant.

“I can, without hesitation, recommend the services of Headley Meredith Associates. They have provided me with a first class service and I have found them to be extremely thorough, informative and proactive throughout.”

Carl A Hall – Financial Accounting Services Limited

This is a risk free exercise, has little or no disruption to your business and potentially offers the greatest benefit available compared to any other business. If you own a hotel then this should be seen as a natural part of your cash flow planning and fundamental to good financial management of your business. To find out more on a totally commitment free and no cost basis contact us here.

April 2014 Deadline

Easter has come and gone and April approaches. Usually that heralds spring and the inclination to look forward to the summer but this year it heralds potential problems for commercial property owners who bought property in April 2014.

Under the changes to the HMRC rules related to the Finance Act 2001, the initial transitionary period ended and the fixed value requirement became necessary for all properties sold/bought after April 2014. The amount of Embedded Capital Allowances within a property had to be fixed and the apportionment agreed through the s198 to ensure there was no doubling up on claims. There is a period of 2 years allowed from the date of the transaction for the s198 to be submitted – if not then HMRC will set the allowances at zero – in perpetuity. They will be lost to all both now and in the future. That is potentially an expensive experience as these valuable allowances will be lost forever and in effect could devalue the property. From this point every month that passes sees more commercial property owners drop off the 2 year buffer and into the realms of mandatory zero setting of allowances – for good.

This is all so unnecessary as a full review using specialist Embedded Capital Allowances experts such as us can identify, quantify and report on allowances due, and present them in a way that HMRC accept and act upon. Its important that the rules are applied that are relevant to the particular property and relate to the rules that were in place when the property was originally purchased. If an accountant acting for a client who owns commercial property does not advise and assist them in this matter then they may well lose out considerably both now and in the future. They should look at this immediately regardless of which of the following categories they fit into.

  • If they own commercial property and have no plans to sell it they should ensure they benefit from the significant allowances that can be identified
  • If they are looking to sell commercial property that they own then they need to ensure that the Fixed Value Requirement is identified and set within the agreement and stated in the s198 document. That way they can probably get retrospective benefits as well as potentially use the remaining available allowances as a negotiating tool. Either way they are in control
  • If they are looking to buy a commercial property they need to ensure that the fixed value requirement is identified and set in any contract and the s198, or they risk having HMRC set it at zero so they can never claim it and defectively the property loses value.

The Finance Act 2001 has been around quite a while but the 2 year deadline that is about to become a reality will now start to negatively affect commercial property owners regardless so it important they review those allowances now.

It costs them nothing to find out as we will do a full review on a totally contingent basis – if there are no allowances then there is no fee. It’s so easy to do and so beneficial in most cases. Speak to your clients about this, put us in touch with them – we believe both you and they will be glad you did.

Be Honest – Do you understand the Laws of Rugby?

There is no doubt that with the Six Nations currently in full swing, rugby fever has gripped the nation and you cannot open a newspaper or switch on the radio or television without being overwhelmed by some obscure reference to an act or combination of events in a rugby match being analysed, dissected and assessed by experts, all of whom seem to have a different interpretation of what the outcome should have been. It does make it hard to see how any form of cohesive situation can come from it all and how any form of structure for the game can ever be possible. Even the referee at times finds it impossible to decide what did happen and what should happen next. So what does he do? He refers it to the Television Match Official or TMO who then, armed with copious slow motion re-runs and countless requests for a different angle arrives at a definitive answer. In those situations how many of us are amazed to find what we thought was obvious (a try – a foot not in touch – a pass going backwards) was in fact not the case and that with the ability for real analysis and review we can see he did drop the ball over the line or he did put his foot in touch or the ball did go forward. It certainly shows the value of reassessing a situation armed with all the facts and some specialised knowledge.

It’s very similar when we consider the situation regarding Embedded Capital Allowances in commercial property. These capital allowances are highly specialised and can be complex to identify and quantify. In many cases assumptions are made concerning the potential for them being available or the belief that the accountant handling the general accounting functions of the business will have done it already. Experience tells us that frequently that is not the case and in reality many successful and highly professional accounting firms prefer to refer this to their own “TMO” which in this field of taxation specialism is us. The accountant can deal with all aspects of capital allowances that can be seen or easily identified but when items are embedded in the building or are obscure items that are not easily recognised as qualifying then the best of the professionals involved may be unable to give fully informed advice and the best of those recognise the need to proactively involve specialists such as us to ensure their client is best served and best advised. If an international referee who is refereeing a rugby match in front of millions recognises they need specialist input then its just the same when highly professional and proficient accountants, solicitors or commercial property agents refer clients to us so we can use our highly specialised in house team to go through the review process.

This was very clearly seen only recently when an accountant who was aware of our services spoke to us about a client who owned a small care home group. They had not long taken over responsibility for the accounts and the client had never previously been advised of any potential for Embedded Capital Allowances. It was in fact an even bigger assumption than that as the client was convinced that nothing would be available and that it could be a costly exercise that would in the end deliver them no benefit. Nothing could have been further from the truth because it costs nothing at all to find out so it’s possible to have a full review at no upfront cost with fees being only charged once the exercise had been done and allowances identified and those then being accepted by HMRC. Once the client realised he would not be expected to pay anything if nothing was found he was happy to let us proceed even though he still felt we would find nothing. We got on with the job in hand, surveys were done, necessary documentation accessed and a report completed. Even though it involved 8 properties the whole thing was completed within a 10 week period and submitted successfully to HMRC. Allowances in excess of £1Million were found which resulted in significant repayments from HMRC with further tax reductions due over the next few years as the allowances continue to be used up. What looked like a situation that could not deliver any positive outcome for the client was in fact a situation that put valuable cash back into their care home business and will continue to help improve cash flow year on year for a number of years and all done with zero risk, no interruption of services and without involving the client in any disruption to their busy schedules. The lesson to be learned is never think it’s been done or that it can’t be done and always remember that finding out costs nothing and risks nothing – not finding out might though. Those who own any form of commercial property should really take heed and get in touch to get their own situation assessed for no cost, no commitment and no assumption.

We don’t know who will win the Rugby World Cup but we do know that making assumptions will never be part of influencing the outcome.