By Peter Ball, Tax Partner at Bishop Fleming
From the 6th of April owners of Furnished Holiday Lets who are married or in civil partnerships will no longer have the flexibility to choose how they allocate profits and losses between themselves.
Instead, these people will have to revert to a default 50/50 split of profits and losses, unless they take action before the end of the tax year.
There is a way to avoid this eventuality and continue to split profits other than 50/50, but owners will need to work through several steps:
- They will need to check and see if they already own the property as tenants in common, rather than jointly. If they hold the property jointly, they will first need to ‘sever’ the joint tenancy and make it a tenancy in common.
- If they do hold as tenants in common, this is often still held 50/50. They will therefore need to consider a different ownership proportion, involving a lawyer to document this.
- Finding lawyer before the end of this tax year who is able to do this work could be challenging.
- Only when the property is held, say, 70/30 can they then notify HMRC that they wish to be taxed 70/30. This notification is done using the form 17. It can be sent up to 60 days following a change in ownership and then applied from the original date.
- If the form 17 is submitted to HMRC at a later date, the change in profit allocation can only be applied with effect from 60 days before the form was submitted.
- If people undertake the planning by 5 April, they will have until the beginning of June to send in the form 17 to HMRC and it will still apply from the 5 April date.
Even with the form 17, the profits or losses will then only be capable of being split based on the actual ownership of the property, whereas until the 5th of April, FHL owners who are married have had much greater flexibility to allocate and vary between themselves.
It’s also worth noting that, although the focus tends to be on the allocation of profits and losses for income tax, it’s important to be aware of the stamp duty implications too. There can be stamp duty triggered on a transfer of an interest between married couples where there is a mortgage on the property. This is often missed by people undertaking this planning and can prove costly.
By Peter Ball, Tax Partner at Bishop Fleming
