Changes brought in by the 2009 Finance Act to the taxation of Furnished Holiday Lettings (FHLs) create a number of opportunities and issues for anyone with qualifying holiday accommodation, whether in the UK or the EEA.

Furnished Holiday Lettings have for a number of years attracted a very favourable tax treatment. The income is treated not as rental income, but as trading income.

This means that the expenses of running the property and any associated capital allowances can be set-off against other personal income to reduce an individual’s tax liability. In addition FHL properties attract favourable capital gains tax rates and reliefs upon sale or other disposal.

Most of the beneficial aspects of this tax treatment will be abolished from 6 April 2010 but, in the meantime, the FHL rules are being extended to include qualifying properties not just in the UK, but anywhere within the European Economic Area (EEA, being the 27 EU Member States plus Iceland, Liechtenstein and Norway).

This extension has retrospective effect, so that amended tax returns for the years 08/09 and 07/08, and potentially earlier years, can be submitted to treat any income and expenses from qualifying properties within the EEA under the same terms that have previously benefited UK properties.

This may result in a worthwhile tax refund for some people, especially where a property that now qualified has since been sold. The treatment can also be applied for the current tax year.

In order for a property to qualify as an FHL, a number of conditions need to be met: the property must be available to let as furnished holiday accommodation for a minimum of 140 days per year, and must actually be so let at commercial rates for at least 70 days.

In addition, the property must not normally be let to the same person for more than 31 days throughout a period of 7 months in each year.

This still means that there is a significant proportion of the year during which the owner (or anyone else) can use it for their own private, longer-term use without losing the property’s ‘FHL’ status.

The changes in the rules not only create a potential tax refund for past years in respect of EEA properties, but also present a window of opportunity for the immediate future in respect of properties both in the EEA and the UK.

This should encourage owners of furnished holiday accommodation to consider very carefully their future intentions with regard to their properties.

If they are holding the property with the intention of future resale then the removal of the significant Capital Gains Tax savings may encourage some to look to sell the property in this current tax year to benefit from the advantageous tax treatment whilst they can.

It is unlikely that the current depressed state of the property market in most countries would encourage a new decision to sell, but if the intention exists in any case, then an adjustment to the timetable could save a significant amount of tax.

On the other hand, if the property is being held as a long-term ‘family’ asset and the current owner’s intention is to pass it on to their children then the removal of the FHL rules means that the property will no longer qualify for CGT holdover relief after 5 April 2010.

It may well be worth considering gifting the property to a younger family member before the end of the current tax year, even if this was not something that was intended for another few years.

Although there has also recently been a tightening up on the rules that allow holiday accommodation to qualify for Business Property Relief from Inheritance Tax (distinct from the FHL rules), there is no indication as yet that this relief might also be in danger of being withdrawn.

This article first appeared in the September edition of Saffery Champness’s ‘Private Client’ newsletter