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TonyTax, Tax Consultant
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Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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I own a holiday cottage which may just fail the FHL criteria

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I own a holiday cottage which may just fail the FHL criteria for the third year.
(a) If it passes FHL criteria in a future year can I simply reinstate it as an FHL on my tax return?
(b) How would my income tax be affected during any years that it doesn't count as FHL? As far as I can see, my income tax would be based on (annual income) minus (annual expenditure) either way
The cottage usually gets rented for about 100 days a year; it usually makes a slight loss of around £250 a year, which I don't mind; and I would like to continue owning it and renting it out for at least another 5 years, whether it counts as FHL or not.
Hi. Let me take a look at this and I'll get back to you.
Take a look at the notes below for detailed information on the FHL system. In particular, refer to the averaging election and period of grace elections which may help.
(a) Provided you meet the criteria in a future year, you can reinstate the FHL status.
(b) You cannot set non FHL losses against other sources of income. Such losses can only be offset against future non FHL rental profits. If you make a profit, you pay tax as normal.
I hope this helps but let me know if you have any further questions.
Customer: replied 2 years ago.
Thanks for answer (a).
On (b), as I understand it, I already can't set FHL losses against any other sources of income I possess; I thought that would be "sideways transfer" and had been stopped some years back. My only other income is my company pension and soon state pension - are you saying I could set FHL losses against these?
Also on (b), I was asking whether my net tax would be the same whether or not the property was FHL?
I had already seen the link.
(b) FHL losses were stopped from being used against other sources of income with effect from 6 April 2011. Any losses you do have will need to be carried forward for offset against the same business. It's an odd situation because you can claim entrepreneurs' relief on FHL property sales like any other business so taking away sideways loss relief in the was harsh.The tax will be basically the same but you can pension FHL profits as earned income which you cannot do with regular rental income. You should not notice any significant difference in the tax. There are some differences around capital allowances which you can read about here:
Customer: replied 2 years ago.
Please can you just close off the last part of my second question: If I report the annual income for the cottage as ordinary property on my tax return (ie not FHL), can I still offset this with the running costs of the cottage? Or do I just get taxed on all the income, without being able to offset this with any costs?
You can still offset costs. Take a look here for the types of expenses you can claim which aren't any different to what you can claim for a FHL. The buy to let market is huge but nobody would be interested if expenses were not deductible.
Customer: replied 2 years ago.
One last question: our FHL cottage has almost £6000 of accumulated loss carried forward, and about £3000 of capital allowance carried forward. If next year it becomes non-FHL, can we set these accumulated losses against its non-FHL income? Or does the new non-FHL status mean starting again from zero?
I'll get back to you on that later.
Hi again.
I've read contradictory information about FHL losses being available for offset against non FHL rental profits from the same property but as you will read at the bottom of HS253 under the heading "What you can do with losses" they can only be carried forward against future FHL profits from the same business.
I've also experimented with my tax software to see how FHL losses can be used and they can only be carried forward for use against future FHL profits. So, sadly, the answer is they cannot be set against general rental income. Losses on general rental income can be offset against FHL profits, however. See page UKPN7 of the SA105 property pages notes here:
If you look at the SA105 pages below, you will see there is no box to offset FHL losses anywhere, sideways or against other letting income which is what I found with my tax software:
The periods of grace and averaging elections are there to be help with non FHL qualifying years but if your property fails those tests too, then you should refer to the section headed "Property stops being an FHL" in HS253 below. I'm afraid that doesn't help you if the balancing allowances create losses. HMRC won't allow you to carry forward losses indefinitely if the FHL tests continue to be failed.
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