Furnished Holiday Businesses-FHBs
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(FHBs) FORMERLY KNOWN AS FHLs
There is no doubt that there has been some serious debate and lobbying by
major holiday cottage groups and tourism groups to overturn the 22 April 2009
It has been promoted that there was no advance discussion before 22 April 2009.
However, the Government via Stephen Timms, the Financial Secretary, have
promoted that this will be discussed at the time of the forthcoming pre Budget
Report before the introduction of the measure in Finance Bill 2010.
Fairness for Residential Landlords
One point raised by Stephen Timms is fairness to the residential landlord. It
appears he considers that many residential landlords provide services and
undertake activities similar to the FHL landlords. Perhaps that is a whole
separate subject for debate – it provides to lead and give direction to the
thinking that must arise from the proposed changes.
The new thinking for genuine cottage businesses is to forget the concept of
landlord and letting and instead consider:
“A” – Adventure in the nature of trade
“B” – Business
FHL Tax Relief restricted to Income Tax and Capital Gains Tax (CGT)
There must also be the consideration of the fact that the FHL rules only present
advantages of income tax and CGT relief AND they had to be commercial.
Inheritance Tax (IHT) relief via Business Property Relief (BPR) was, and is, a
separate subject. The consideration has to be think business forget landlord and
think on the concept of a hotel and the provision of services.
So what tax reliefs will apparently be lost from 6 April 2010?
1. The sale of the FHL business will no longer be eligible for the following
capital gains tax reliefs:
(a) entrepreneur’s relief (which reduces the taxable gains on the sale of a
business to an effective 10% rate from an 18% rate);
(b) roll-over relief (which allows gains arising on the sale of business assets
to be deferred if the proceeds of sale are reinvested into other business
(c) specific hold-over relief for business assets (which allows the accrued
gains arising on a lifetime gift of property to another individual to be
deferred and assumed by the donee).
2. Losses from FHLs will not be able to be set against other income (e.g. other
trading or employment income).
3. Capital Allowances would not be available (instead there will be ‘wear and
4. Income from FHL will no longer be ‘relevant earnings’ for pension purposes
(which could affect those who have no other trading or employment income).
The Way Forward for the Holiday Business
From the practical commercial viewpoint the owner of the accommodation has to
decide what direction they want to take their holiday business – landlord or
viable, economic commercial undertaking (trade)?
So what are the problems of the “A” word – the adventure in the nature of a
1. A true commercial business is as “it says on the tin” an adventure - an
undertaking that involves risks and service to the client.
2. Class 4 National insurance (NIC). As a business when the profits exceed a
certain level then Class 4 NIC is due, although there are deferments for those
with Class 1 earnings through employment and retirement age advantages.
Tax Planning – Which tax is the driver?
If it is accepted the FHL rule book is thrown away from 6 April 2010 and the
birth of the FHB takes place the owners of the property must consider what the
main drivers are for wanting FHL tax relief and the tax reliefs that surround a
business providing holiday accommodation and use this to help their decision
Inheritance Tax (IHT)
Elderly owners of holiday cottages could well be very driven by the possible IHT
reliefs but IHT reliefs were not part of the FHL package.
IHT relief will depend on “level and type of services” provided to
holidaymakers, e.g. provision of meals, cleaning and hotel type services. See
IHTM 25278 which confirms that HMRC are scrutinising claims for BPR on holiday
On a farm holiday lettings may be eligible under Farmer v IRC principles and now
the Earl of Balfour as part of a larger business. Beware a separate “person”,
e.g. farmer’s wife is carrying on business for VAT reasons, i.e. to not charge
VAT on the holiday service.
Case law suggests that in order to qualify for BPR, it might be necessary to own
a number of properties.
IHT relief is normally allowed on FHLs where the following is in place:
• FHLs – the lettings are short term (for example, weekly, fortnightly); and
• The owner – either himself or through an agent such as a relative or
housekeeper – was substantially involved with the holidaymaker(s) in terms of
their activities on and from the premises, even if the letting were for part of
the year only.”
As usual, whether this IHT test will be satisfied will depend on the facts. The
question is if such businesses would not be excluded by the Inheritance Tax Act
1984 (IHTA 1984), s.105(3). The criterion is where the owner (either himself or
through agents), ‘was substantially involved with the holidaymaker(s) in terms
of their activities on and from the premises’. The key issue in order for
cottage owners to secure maximum tax reliefs is to be involved in the actual
Risk areas which might jeopardise the IHT claim are:
• Where no services are provided to holidaymakers;
• Where lettings are to friends and relatives; and
• Longer-term lettings (including assured shortholds).
Let us look at the IHTM Manual:
IHTM25278 – Caravan sites and furnished lettings: Holiday Lettings
In the past we have thought that business property relief would normally be
• The lettings were short term, and
• The owner, either himself or through an agent such as a relative, was
substantially involved with the holidaymakers in terms of their activities on
and from the premises.
Recent advice from Solicitor’s Office has caused us to reconsider our approach
and it may well be that some cases that might have previously qualified should
not have done so. In particular we will be looking more closely at the level and
type of services, rather than who provided them.
Until further notice any case involving a claim for business property relief on
a holiday let should be referred to the Technical Team (Litigation) for
consideration at an early stage.
Is this a good time to pass the holiday accommodation to the next generation? If
it is considered that an “adventure in the nature of trade” and “business” can
be established for an elderly taxpayer is the opportunity to pass the property
to the next generation now?
Capital Gains Tax (CGT)
The apparent CGT negatives of the change from 6 April 2010 have been presented
earlier and the CGT planning point re the holdover relief is set out below:
Note that until 5 April 2010, CGT holdover relief will be available under s.165
TCGA 1992 if “trading conditions” (availability for letting and actual short
lettings for holidays) satisfied (s.241 TCGA 1992). Is there a case for
Potentially Exempt Transfer (PET) to avoid arguments about Business Property
However, it is likely that the CGT advantages, especially rollover, i.e. being
able to roll the gain into another property will be lost and this presents a
planning opportunity before 5 April 2010.
Those most adversely affected by the CGT changes will be owners of properties
with development potential or large potential gains that they plan to realise in
the near future. The choices would have to be ensure a robust business
classification or consider action before 5 April 2010 when the CGT reliefs are
The loss of capital allowances and the move to wear and tear or the renewals
basis must be considered and risk/cost assessed. The largest disadvantage of the
FHL rule change has to be the loss (excuse pun) of the ability to offset the
income tax losses against total income. In order to mitigate this disadvantage
the cottage owner must make a robust move toward the genuine trade or look at
the reasons for the loss, e.g. loan interest, non-commercial transactions, areas
of excessive expenditure. An action plan could be:
1. Loans – repay from other investments? Consider total restructure.
2. Expenditure – look at timing, consider incurring maximum FHL expenditure
prior to 5 April 2010.
3. Commerciality – the “C” word. Review all non-commercial arrangements, look at
any method of improving the commercial approach and evidence all attempts at the
It is considered that possibly some FHL loss claims have been allowed which
should have come under HMRC scrutiny. Perhaps those in this position should not
“protest and shout” too much!
The FHL rules did not apply to VAT so in theory the cottage owner is stuck with
the problem regardless of 6 April 2010 but a change is being lobbied, i.e. that
there should be no VAT charged if the income is letting property, the word
“consistency” comes to mind.
There are strong arguments to maximise the input VAT claim prior to 5 April
2010. However, some FHL property might convert back to normal residential lets
and VAT planning around this action must be considered.
FHL/FHB and loan planning should be considered in the round. Interest is allowed
for income tax rules based on the PURPOSE of the loan whereas for IHT purposes
the loan should be allocated against the property it is secured on. Loans
secured on non-business property are efficient and needs real contemplation in
the restructuring moving forward.
IHT – A tax case waiting to happen?
It is considered by many that an FHL/FHB IHT is tax case waiting to be heard by
HMRC Tax Tribunal.
HMRC would no doubt like to choose a hopeless BPR claim that can be “walked all
over” and show why the idea of FHLs qualify as a “non-investment business”. It
is therefore essential that the FHL or FHB case that goes before the Revenue
Tribunal must be strong. HMRC would like to see FHLs put firmly in the claws of
s.105(3) but this insults the real holiday cottage businesses that exist in the
UK. If any BPR case looks like appearing before the Revenue Tribunal the UK
tourist authorities must put all their energy into fighting the case.
Forget the “L” word - there are a large amount of “FHBs” in the UK which need to
be recognised as a business now. Rethink, restructure and register the business
with HMRC/Contributions Agency as a trade using form CWF1 (check HMRC website)
when and if the total rethink and restructure is carefully in place. For the
property that will stay as a “FHL” there is a lot of planning to be undertaken
by 5 April 2010.
6 August 2009
About the Author
Article supplied by Julie
Butler F.C.A. Butler & Co, Bowland House, West Street, Alresford, Hampshire,
SO24 9AT. Tel: 01962 735544. Email; email@example.com, Website;
Julie Butler F.C.A. is the author of Tax Planning for Farm and Land
Diversification ISBN: 0754517691 (1st edition) and ISBN:
0754522180 (2nd edition) and Equine Tax Planning ISBN:
0406966540. The third edition of Tax Planning For Farm and Land
Diversification will be published shortly.
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Article Published/Sorted/Amended on Scopulus 2009-08-23 17:28:30 in Tax Articles