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HMRC internal manual

Property Income Manual

Furnished holiday lettings: treatment of losses for 2010-11 and earlier

The guidance that follows only applies to tax year 2010-11 and earlier. Please see PIM4120 for 2011-12 and later.

Summary

If a customer had a loss on furnished holiday lettings and a profit on other rental income, the loss would normally be relieved in the overall calculation of rental business profits. However, the landlord could claim relief for the loss separately against:

  • general income, which could result in relief at an earlier time than if the loss were absorbed in the rental business computation (IT cases),

  • total profits (CT cases),

  • Capital Gains Tax (IT cases).

If a claim was made look under the ‘other guidance’ heading below.

Furnished holiday lettings losses against general income

Furnished holiday lettings are treated like a trade for loss purposes and got the same loss reliefs as trades. See:

  • ICTA88/S503 (1) for CT cases (upto 2010-11) and IT cases (up to 2004-05)

  • ICTA88/S504A (1) for IT cases (for 2005-06 and 2006-07), and

  • ITA07/S127 (3) for IT cases (for 2007-08 onwards).

Thus, where a rental business includes sources of furnished holiday lettings, any IT losses arising in that part of the business could be relieved either sideways or backwards against general income. Otherwise the losses would be relieved against any other rental business profits for the year.

Any surplus of unrelieved loss was carried forward and set off against rental business profits of subsequent years so long as the rental business continued.

Sideways set off of furnished holiday lettings loss (IT cases)

Where a customer let property as a furnished holiday let and made a loss on all properties let as furnished holiday accommodation taken together they could choose whether to set that loss:

  • against their general income, or

  • any losses not claimed against general income were required to be set first against any other profits of their rental business in the same tax year;  with any balance remaining carried forward against the first available profits.

Their furnished holiday lettings loss may consist, wholly or partly, of plant and machinery capital allowances. Do not use ICTA88/S384 (6) or ITA07/S75 to attempt to exclude the capital allowances element of a loss from sideways relief. These provisions are omitted from the property loss relief rules by:

  • ICTA88/S503 (3) for years up to 2004-05,

  • ICTA88/S504A (3) for 2005-06 and 2006-07, and

  • ITA07/S127 (4) for 2007-08 onwards.

The whole loss, including the capital allowances, could be set against any other profits of their rental business for the same year or, if appropriate, carried forward and set against profits of the same business in later years (PIM4210).

Where the rental business was made up solely of furnished holiday lettings any losses could either be set against general income or carried forward.

Where the rental business was made up partly of furnished holiday lettings and partly of other land and property the customer could choose whether to set any loss made from their furnished holiday lettings against their other general income. Any losses not claimed against general income were required be first set against any other profits of their rental business in the same tax year. Any balance of loss was carried forward against the first available profits of the same rental business in later tax years.

The distinction between ordinary lettings and furnished holiday lettings may be important in some situations because the customer may be able to save tax by making the right choice.

For example, this may be the case when the customer has ordinary rental business profits of £1,000 (not furnished holiday lettings) in the current tax year and also ordinary rental business losses of £1,000 brought forward from an earlier tax year. The earlier rental business losses will reduce their ordinary rental business profits of the current year to nil. Then a loss of, say, £500 arising from their furnished holiday lettings can be set off sideways against their general income.

If, instead, they let their furnished holiday lettings losses merge into their general rental business result, the outcome would have been:

  • a net rental business loss of £500 (current profit of £1,000 less loss brought forward £1,000 and furnished holiday lettings loss of £500),

  • no sideways losses to set against general income, and

  • a loss of £500 to carry forward to the next tax year.

Sideways relief against general income

Relief for furnished holiday lettings losses against general income (excluding rental business income) is given in the same way as trading losses.

The customer can claim to set their furnished holiday lettings losses against their other general income for either the tax year in which the loss was made or the year before the year the loss arose.

Claims & time limits for sideways set off of furnished holiday loss

The time limit for making a claim is 1 year from the 31 January following the year of assessment. E.g. a claim for the tax year ended 5 April 2008 must be made by 31 January 2010.

Furnished holiday lettings: carry back losses of first four years

When a customer first lets a property as a furnished holiday lettings and they make a loss in any of the first four tax years after the start of their rental business, they can set this loss against their other income of the three tax years before the year of loss. This means they may be able to get back tax paid on income received before they started the furnished holiday lettings. See:

  • ICTA88/S381 for years up to 2006-07, and

  • ITA07/S72 for 2007-08 onwards.

In deciding which are the first four years for the purposes of the carry back relief, only look at properties let as furnished holiday lettings. Don’t count other lettings. But you have to look at all the furnished holiday lettings and the four-year commencement period begins with the first letting of any of these properties as furnished accommodation. It does not matter whether that letting qualified at the time as a furnished holiday letting. See:

  • ICTA88/S503 (3) for years up to 2004-05,

  • ICTA88/S504A (3) for 2005-06 and 2006-07, and

  • ITA07/S127 (5) for 2007-08 onwards.

For more about when a rental business starts see PIM2505.

Furnished holiday lettings: terminal losses

Special rules may also apply if the furnished holiday letting ceases and the customer has made losses. See:

  • ICTA88/S388 for years up to 2006-07, and

  • ITA07/S89 for 2007-08 onwards.

For more about when a rental business ends see PIM2510.

Claims & time limits for carry back of furnished holiday letting losses

The time limit for making a claim is 1 year from the 31 January following the year of assessment. For example, a claim for the tax year ended 5 April 2008 must be made by 31 January 2010.

Furnished holiday letting losses set against CG

If the customer’s losses exceed their income they can also choose to set their losses against their CG. See:

  • FA91/S72 (1) for years up to 2006-07, and

  • TCGA92/S261D for 2007-08 onwards.

Other guidance

If loss relief is claimed, proceed as for any trade loss (but see the guidance below regarding Class 4 NIC). For claims under:

  • ICTA88/S380 or ITA07/S64, see BIM75410 onwards.

  • ICTA88/S381 or ITA07/S72, see BIM75450 onwards (and the further guidance below).

  • ICTA88/S388 or ITA07/S89, see BIM75480 onwards.

  • ICTA88/S393 (CT cases), see CTM04000 onwards.

  • FA91/S72 (1) or TCGA92/S261D, see BIM75420 onwards.

Class 4 National Insurance Contributions

Class 4 National Insurance Contributions are not payable on furnished holiday lettings profits. Similarly, furnished holiday lettings losses, which are being claimed against general income, will not be allowable for Class 4 purposes.

Claims under ICTA88/S381 or ITA07/S72

Loss relief under Section 381 is normally available where a trade was set up and commenced in the year of assessment concerned or in the previous three years. In the case of furnished holiday lettings this rule is modified by:

  • ICTA88/S503 (3) for years up to 2004-05,

  • ICTA88/S504A (3) for 2005-06 and 2006-07, and

  • ITA07/S127 (5) for 2007-08 onwards.

No Section 381 relief is available if any of the accommodation was first let as furnished accommodation more than three years before the year of assessment. So the relief may be precluded, for example, if the accommodation had earlier been let furnished other than as holiday accommodation. This rule applies however long ago the first furnished letting took place.