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

In a groundbreaking deal, HM Revenue and Customs (HMRC) has this week signed an agreement with Liechtenstein, so the Alpine principality will try to force UK citizens with money hidden in its banks to come clean with the UK’s tax authorities.

This is a significant breakthrough in the negotiations, which have been continuing since the G20 Summit in early April where an international co-ordinated approach was adopted in pressuring tax havens such as Liechtenstein to provide information to the tax authorities.

If they did not co-operate they would be put on a “black list” which could have caused them certain difficulties in terms of international cooperation, trade, and so on.

As a result of the agreement Liechtenstein will be the first of the offshore tax havens to offer transparency on UK individuals holding bank accounts there.

Next in line?

It remains to be seen whether other tax havens will follow suit. However, this is the first breach in the wall of secrecy surrounding tax havens and there is no doubt that it spells the beginning of the end for tax dodgers operating offshore accounts.

HMRC estimates that approximately 5,000 British investors own bank accounts in Liechtenstein and estimates of the unpaid tax due to the Exchequer range up to £3bn.

To that figure may be added interest and penalties, so the potential return to the Exchequer could be very substantial indeed.

If these figures are reliable, the sums recoverable on a worldwide basis should all other tax havens follow Liechtenstein’s example will be eye watering.

Under the recently announced second amnesty to holders of offshore bank accounts, HMRC has offered relatively generous terms by capping penalties at 10% of the tax due whereas, in the most serious cases, these could be as high as 100% of the tax due.

The interest chargeable on unpaid tax is however non-negotiable and given that the Revenue will be looking back at the previous 10 years, the interest sums alone could be very substantial.

The Revenue is adopting a stick and carrot approach to this initiative and for those who decide not to avail themselves of it, the stick could be very hard indeed because the Liechtenstein bank accounts risk being frozen.

Movement

No doubt many tax evaders will attempt to move their cash out of Liechtenstein in the short term.

However, it would be naive of them to expect that HMRC will not pay very close attention to those who do.

A Revenue spokesman said it had many sources of information on tax dodgers and that these people could not hope to slip away undetected by simply closing their accounts in Liechtenstein and moving their money elsewhere.

The Revenue’s counter-evasion tactics have proven hugely successful, particularly in the period since the introduction of self-assessment when many Revenue staff have been retrained to look at investigatory work.

To put this into context, the yield from the Revenue’s counter evasion work has increased dramatically over the past 15 years, having gone from £1.13bn in 1991/92 to more than £12.8bn in 2007/08.

Encouraged by this success, the Revenue has now announced that it intends to spend £1bn, equal to 25% of its entire budget, on enforcement and compliance this year.

The world is becoming a very much smaller place for tax evaders and time is running out. They would be well advised to come clean with the Revenue and prepare a full disclosure report.

This article first appeared on the BBC’s website on 12 August 2009

Ronnie Ludwig

Partner, Saffery Champness

OWNERS of overseas holiday properties have been given a window of opportunity in which to claim valuable tax perks.

In the 2009 Budget the Chancellor announced that the tax treatment of qualifying furnished holiday lettings (FHL) is to be extended to all properties in the European Economic Area until 2010. After that date this treatment will be abolished for all properties, whether in the UK or elsewhere, and so clearly this represents an opportunity for owners of qualifying foreign property.

Property qualifies as an FHL if it is available for holiday letting on a commercial basis for at least 140 days a year, and is actually let commercially for at least 70 days in a twelve month period. It must not be let continuously to the same person for more than 31 days in a seven month period.

The extension of the rules means that owners of qualifying properties will be treated for UK tax purposes in exactly the same way as those who own qualifying properties in the UK, and gives owners the chance to claim capital allowances and loss relief against other income or capital gains.

It also means that UK taxpayers who have sold overseas properties in recent years may be able to claim reliefs such as business asset rollover relief. This is where the gain arising on the disposal of a property may be rolled over into the acquisition of a new qualifying property or other business asset if the new property is acquired within three years of the disposal of the old one.

Assuming that the property qualifies as a FHL, it should be possible to offset any losses arising on the foreign property against general UK tax liabilities, but only up to 6 April 2010. The earliest year which can be opened up to claim FHL tax treatment is 2006/07 or, for corporation tax, accounting periods ending on or after 31 December 2006. However the deadline for lodging an amendment to the 2006/07 tax returns expires on 31 July, so prompt action is necessary.

Other tax reliefs which may be claimed include relief for pension fund contributions, entrepreneurs’ relief (which means that on sale any UK capital gains tax will be limited to 10 per cent on the first £1 million of gains), loss relief carried forward to set against future profits, and terminal loss relief where losses on termination of the trade may be carried back to set off against profits up to three years earlier. Unfortunately, if the foreign property would not qualify as an FHL, it will not be possible to offset any losses arising against general UK tax liabilities, or indeed to claim many of their reliefs referred to above.

Professional advice should be taken however, especially where the ownership has been structured through a foreign company.

Ronnie Ludwig is a Partner in the Private Wealth Group at Saffery Champness.

This article first appeared in The Scotsman

Disclosure of tax avoidance Schemes

The current rules will be amended so as to simplify and improve the reporting of schemes. In addition changes will be made to the reporting date of such schemes to the tax year of the implementation and this will now apply in all cases. The changes will have effect for tax return periods beginning on or after 1 April 2009.

Employment Related Securities

As part of a simplification review, legislation will be introduced in Finance Bill 2009 to simplify certain tax rules that apply to employment-related securities or shares. It is proposed that there will be no tax charge in the following circumstances:

• where an employee receives shares which are payable by instalments and the shares are then sold before all of the instalments have been paid. This will not apply if the employee is released from payment.

• a sale by an employee of nil or partly-paid shares.

• where an employee receives new shares in proportion to their existing shareholding as a result of a scrip or bonus issue.

Principles based approach to financial products avoidance

Two new anti avoidance rules are introduced in the Government’s new “principles based” format, which appears to be a synonym for “widely drawn”, the intention being to counter tax avoidance by legislation with general application rather than drafting rules applying to particular situations. The risk is of course that “innocent” transactions in which avoidance is not a motive can be caught.

The first issue to be dealt with is “disguised interest”, where an arrangement is entered into by companies which is economically similar to a loan (involving an advance of capital with a subsequent repayment and reward based on the time value of money). There is existing legislation which deals with various types of disguised loans already and the intention is to replace this with a set of general rules, via amendments to the forthcoming Corporation Tax Act 2009, so that the time value of money return is charged to corporation tax where the arrangement is structured with the intention of producing a return that is not income.

The second issue is the sale of income streams. The proposed anti avoidance legislation is again intended to replace a patchwork of earlier rules that cover specific schemes with an overriding rule for both individuals and companies that the sale of income, as separate from the sale of an income-producing asset, will give rise to an income return and be taxed as such.

Leasing

With effect from 13 November 2008 the government has taken steps to prevent a loss of tax in respect of:

• Transactions involving the leasing of plant or machinery under long funding leases;

This will affect businesses leasing plant and machinery and has been introduced to counter avoidance involving a leaseback following the sale or lease of plant and machinery where excess relief may have been obtained.

• The sale of a company that is an intermediate lessor of plant or machinery;

This will affect companies carrying on a business of leasing plant or machinery. The measure is to counteract an avoidance scheme that uses a sale and leaseback arrangement.

• Rents payable on long funding leases of films.

This will affect lessors of films, including partnerships and other businesses. Legislation will be introduced in Finance Bill 2009 to counter aggressive avoidance involving businesses leasing films to others under a long funding lease by providing that rents under the lease are taxable in full.

Corporation tax small companies’ rate

The increase in the small companies’ corporation tax rate from 21% to 22% will be deferred until April 2010.

Extension of carry back of trading losses

A company may normally carry back any trading loss arising in an accounting period for 12 months, and set that loss against its profits from any source. New rules apply to losses of accounting periods ending in the period 24 November 2008 to 23 November 2009 to allow trading losses to be carried back for more than one year in some circumstances.

If a company’s trading losses for an accounting period ending in the year to 23 November 2009 cannot be fully relieved by carrying back one year, then up to £50,000 the unrelieved excess may be carried back against trading profits only for a further two years, on a LIFO basis. This means that, for example, where a company’s trading results are as follows:

Year ended 31 December 2008    (£150,000)
Year ended 31 December 2007    £40,000
Year ended 31 December 2006    £40,000
Year ended 31 December 2005    £40,000

the company can offset £40,000 of the 2008 loss against any income of 2007 as normal. A further £50,000 is carried back to the two earlier years, £40,000 of which is offset against the 2006 trading profits before £10,000 is carried back against the 2005 trading profits. The unrelieved loss of £60,000 is carried forward against future profits of the same trade as normal.

There are a number of computational rules to ensure that companies do not abuse the relief by altering their accounting year end dates. If the accounting period ending in the year to 23 November 2009 is less than 12 months long, the £50,000 limit will be reduced proportionally. In addition, if two accounting periods end in the year to 23 November 2009, the £50,000 limit applies to both periods.

Loan relationships

Two changes will be introduced in Finance Bill 2009 to amend the loan relationship rules affecting connected companies and it is proposed that the changes will have effect for company accounting periods beginning on or after 1 April 2009.

The first change means that a debtor company would no longer be taxable on the release of a trade debt from a connected creditor. Previously where a creditor formally released a connected debtor from a trade debt, the creditor would have been denied a deduction for the loss on the debt but the debtor may have been taxed on its ‘profit’.

The second proposed change is still under consultation however the change concerns the rule that allows a debtor company a deduction for interest payable to a connected creditor that is outside the loan relationships rules only on a paid basis, rather than on an accruals basis that normally applies. It is proposed that the rule should be amended to provide certainty about its operation.

Taxation of foreign profits

The Government will bring forward a package of reforms to the taxation of foreign profits in Finance Bill 2009 which will include:

• An exemption from tax for most foreign dividends received by medium and large companies regardless of level of shareholding.

• A Targeted Anti- Avoidance Rule to avoid the dividend exemption being exploited.

• Worldwide debt cap on interest.

• Changes to the Controlled Foreign Company (CFC) rules.

• Reform of the existing Treasury consent rules.

Income tax rates and allowances

The income tax personal allowance is set for 2009/10 at £6,475. This is an increase of £440. The basic personal allowance for 2008/09 was increased from £5,435 to £6,035 in May 2008 and therefore the further increase reflects a rise above inflation.

It was also announced that from 6 April 2010 the basic personal allowance for income tax for individuals whose gross income is more than £100,000 will be reduced by £1 for every £2 above £100,000 up to a maximum of 50% of the personal allowance. For individuals with gross income of more than £140,000 the personal allowance will be further reduced by £1 for every £2 above £140,000 until the personal allowance is extinguished.

From 6 April 2011 there will also be a new 45% rate of income tax which will apply to taxable non-savings and savings income above £150,000.

Tax rate on dividends

From 6 April 2011 there will also be a new higher rate of tax for dividend income. The new rate of tax of 37.5% will apply to dividends which would otherwise be taxable at the new rate of 45%. There will therefore be three rates of tax for dividends, the 10% basic rate, the 32.5% upper rate and the 37.5% higher rate.

The rate applicable to trusts

Also from 6 April 2011, the trust rate will be increased. The dividend trust rate will be increased from 32.5% to 37.5% and the trust rate of tax will be increased from 40% to 45%. This will affect discretionary trusts and some specific capital receipts by all trusts.

National Insurance contributions

From April 2011 there will be a 0.5% increase in the employer, employee and self employed rates of national insurance together with an increase in the point at which people pay national insurance to align this with the income tax personal allowance. This will make the overall rate (tax and national insurance) of 46.5% on earnings above £150,000.

Extension of carry back of trading losses

An individual carrying on a trade, whether on his own account or in partnership may normally set the loss against general income in the same year or the previous year (referred to as “sideways loss relief”). New rules apply to allow trading losses of 2008/09 to be carried back to 2005/06 and 2006/07.

If an individual’s trading losses for 2008/09 are not fully relieved by making sideways loss relief claims for the same year or the previous year, then up to £50,000 of the unrelieved excess may be carried back against trading losses only to 2005/06 and 2006/07, on a LIFO basis.

The Treasury states that all the rules which restrict loss relief claims will also apply to the new relief, which is not entirely clear but could conceivably include the “inactive partner” rules that restrict loss relief claims to £25,000 per year and to the amount of capital contributed in some circumstances. We will need to wait for legislation to determine whether this is likely to be an issue.

The rules allow only trading losses to be carried back further, but professions, vocations and certain furnished holiday lettings losses are treated as trading losses for this purpose.

The new relief will also apply for the purposes of calculating Class 4 NIC liability, and could therefore conceivably lead to NIC repayments.

Saffery Champness Partner Tim Gregory was quoted in Today’s Financial Times, commenting on the tax case of businessman Robert Gains-Cooper, whose dispute with HM Revenue & Customs centred on the issue of whether he had truly ‘lost’ his UK domicile.

Click here to read the full article

There is only a month left before the 30th September self-assessment tax deadline. Self-assessment taxpayers who want HMRC to calculate their tax liability due for the 2007/2008 tax year must submit their returns by this date.

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