What obligations do I as Owner have to undertake prior to letting?
As you will appreciate there are certain statutory and other requirements that must be undertaken before we are able to market your property. We are more than happy to help you with these matters so please call our Property Services team if you require any assistance.
Firstly, all owners who let their properties must ensure that comprehensive insurance is effected which specifically covers holiday letting and includes appropriate Public Liability Insurance (we recommend minimum cover of £2,000,000).
All beds and upholstery must comply with the Furniture (Fire) (Safety) Regulations 1988 (all upholstered furniture purchased after 1st March 1990 should meet these requirements). The only exception to this regulation is furniture made and/or re-upholstered before 1950.
The Gas Safety Installation and Use Regulations came into force in 1994 and state that an annual safety check must be carried out by a suitably registered engineer. All appliances must confirm to the current legislation and be maintained safely. For further details please contact your local Health & Safety Executive.
All owners have a duty of care to ensure electrical systems and appliances are well maintained at all times and must (at least) carry out a visual inspection each year to check for general ‘wear and tear’ and other potential defects.
It is recommended that a Portable Appliance Test (PAT) be undertaken by a suitably qualified engineer on a regular basis. Any new installations or alterations must be undertaken by a qualified electrician and formally approved by a member of the National Inspection Council for Electrical Installation.
FIRE RISK ASSESSMENT
As a landlord you must ensure that your property has a clear means of escape, warning systems installed and appropriate fire fighting equipment available at all times. Statutory records must be kept to verify annual equipment tests and ensure fire certifications are always up to date.
To enable this process to be completed effectively we recommend an independent contractor undertake a risk assessment at yourproperty, supply and install any required fire fighting equipment, maintain a log book, issue a fire safety certificate and provide a leaflet of instructions for your tenants on what to do in the event of a fire. The contractor will also carry out an annual inspection of your property to ensure that you remain compliant and will implement any changes should the laws governing fire regulations alter.
Your property will require the following equipment:
A smoke detection system – we recommend a 10 year lithium battery smoke alarm to BS standard – a minimum of two smoke detectors will be required
Carbon Monoxide Detector (Properties with gas or oil supply only)
2kg Dry Powder Extinguisher for small kitchen fires
Water Fire Extinguisher – will only be required for properties with an open fire or properties that have a thatched roof Access statements
It is a requirement of VisitBritain that each property is assessed for accessibility to disabled visitors. An example of an Access Statement is supplied within this guide.
Owners should be aware that there are tax implications for revenues accrued from holiday letting. We strongly advise that prospective owners seek professional advice with regard to this position. There is an Inland Revenue booklet Taxation of Rents; A guide to property income (Practitioners Series, IR150) which gives more details. Your local tax office will normally supply this booklet on request.
Non-Resident Landlords Scheme (NRLS)
The NRLS is a scheme for taxing the UK rental of non-resident landlords. It applies if any owner or landlord has a “usual place of abode” which is outside the UK. If you are either live overseas, or are moving overseas, or spend more than six months a year away, then you will be affected by the NRLS. With partnerships and jointly owned property, the “usual place of abode” must be established for each partner.
As a UK letting agent we are required to deduct basic rate tax from any rent collected for non-resident landlords, unless HM Revenue & Customs (HMRC) tells us not to deduct tax. An full NRLS fact-sheet is available on request with further details available from the HMRC website www.hmrc.gov.uk/cnr
Withdrawing the Furnished Holiday Letting Rules from 2010-11
In the Budget on 22nd April 2009, the Chancellor Alistair Darling announced that the favourable tax treatment available to furnished holiday lettings (FHL’s) is to be abolished in April 2010. This will affect income tax, CGT and potentially IHT.
Currently a home qualifies as a holiday property if it is furnished, being run as a commercial business and available for rent to the public for at least 140 days per year. It must also be actually let for at least 70 days per year.
As part of the Pre-Budget Report on 9th December 2009, further documents were released confirming the proposed changes, along with some detailed guidance and draft legislation on how these will be implemented.
However, these measures are not yet law as they have to be contained within a Finance Bill and the timing of this will depend upon the forthcoming election. The tourism industry continues to lobby against these changes, but for the time being it would be reasonable to assume that they will go through.
From 2010/11 FHL businesses will be treated in the same way as other types of property business and the normal property income rules will apply. FHL income will no longer be treated as though a qualifying FHL business is a trade for tax purposes. FHL businesses may continue to claim their business expenses as a deduction against the property income, and these may include mortgage interest, repairs, business utility bills, wages etc. It had been hoped that where several FHL properties were let as part of a business/small complex, that this activity would amount to a trade, especially where the owners were on site and attended to the properties themselves. However, the guidance suggests that even in these circumstances, the income will still be treated as arising from a property business, not a trade.
After the FHL rules are withdrawn, tax relief will still be available for losses incurred through letting furnished holiday accommodation, but the way in which those losses can be used will change and it will no longer be possible to set these losses against “other income”. Instead, they can only be set against profits from the property business and carried forward to subsequent tax years.
The draft legislation indicates that FHL losses arising in 2009/10 will be treated as a property business loss, which effectively means that the favorable loss treatment has been withdrawn from 2009/10.
From 6 April 2010 expenditure incurred in providing plant and machinery for use in a FHL dwelling house will not qualify for plant and machinery capital allowances.
There will be a continuing entitlement to claim capital allowances on the remaining balance of your capital allowances pool, but not on any future additions. For future capital expenditure relating to fixtures and fittings and furnishings, there will be the 10% wear and tear allowance (being 10% of gross income less rates) as for other furnished lettings.
From a planning perspective, therefore, it would make sense to accelerate capital expenditure to pre 6th April 2010 in order to get capital allowances
Claims under the Landlords Energy Savings Allowance (LESA) will still be allowed.
Division of profits between Married Couples/Civil Partners
Because the income from furnished holiday letting is currently considered to be “trading” income, it has been possible to divide this income between owners in such a way as they choose. Normally this would be to allocate losses to the higher earning partner, or profits to the partner with the lower income.
In future, for jointly owned property, owners wishing to share profits/losses unequally will need to either change the beneficial ownership or put in place a Declaration of Trust which will require the services of a solicitor. You will also have to make a joint declaration in writing to HMRC for income to be taxed in accordance with the beneficial ownership of the property. Even so, it will be impractical to alter the beneficial ownership annually just to allocate profits or losses in the most beneficial way.
Capital Gains Tax
FHL activity will be considered to have ceased on 5th April 2010 so that it will not be possible to claim any of the capital gains tax reliefs available for the disposal of business assets from that date.
Entitlement to entrepreneurs’ relief may continue for a further three years from 5th April 2010 if a property is sold in that period under the normal entrepreneurs’ relief rules for the sale of property within three years of the cessation of trading.
The draft legislation states that gains previously rolled over into the acquisition of a FHL property will not be affected by the repeal.
IHT business property relief applies only to non-investment businesses, where the conditions for relief are satisfied. As short-term letting of furnished holiday accommodation is primarily an investment activity it would not usually qualify. More detailed guidance on BPR can be found on HMRC website at http://www.hmrc.gov.uk/manuals/ihtmanual/IHTM25271.htm
These rules remain unchanged. If the property is available for letting for more than 140 days in the year, it will be liable for business rates rather than council tax.
Points to consider
- If you currently split income other than 50;50 (assuming equal ownership) – then you may want to accelerate or defer revenue expenditure such as repairs and redecoration, to alter the level of profits arising before and after April 2010.
If you intend purchasing any new capital equipment or if furnishings and bed linen etc need replacing, then this should be done before 5th April 2010 so that the expenditure is covered by the Annual Investment Allowance (a 100% capital allowance on annual expenditure up to £50,000), which will be lost after 5th April.
- Any major capital improvements need not be accelerated unless it would qualify for capital allowances – things like extensions, loft conversions and complete renovations would not attract capital allowances and would be carried forward until the property is sold in any event.
- If you let your property out for more than 10 weeks a year but less than 20 – you may currently choose to make it available for more than 20 weeks just to get the beneficial tax treatment for Furnished Holiday Letting. This also means having to pay business rates, which often worked out cheaper than 90% council tax, but this was before the revaluation for business rates, and we are yet to see the outcome of that. Some people would rather pay council tax, as this can confer certain other benefits such as free rubbish collection or preferential mooring rights. In the future, you can make this choice by limiting the availability of letting, as there will be no tax breaks to protect.