Tax blow for owners of British holiday lets

Second-home perks set to be slashed as governement reduces tax breaks in a move set to save the public purse £10m annually.

At present,anyone with a second home qualifying as a furnished holiday let can offset any losses — such as mortgage and maintenance costs in excess of the rent — against their personal income.
From April, however, they will only be able to offset any losses against profits from the same furnished holiday lettings business. Also, they must let the property, and make it available to let, for considerably longer.

In his June budget, the chancellor reversed Labour's plans to scrap the concessions but last week's announcement means it will be far harder for second home owners to qualify in future. Treasury
estimates suggest more than a quarter of the 65,000 people with furnished holiday lets in Britain will no longer be eligible for tax breaks from 2011-12.

What are the rules on furnished holiday lettings?
Currently these allow a person who lets out a second home to treat the property as if it is a trade for certain tax purposes — provided it meets certain criteria and is operated as a commercial business with a view to making a profit. One of the biggest perks involves allowing losses to be offset against an income tax bill or other profits or gains.

From April 2009, the relief was extended to anyone letting out a qualifying property in the European Economic Area.

Furnished holiday lets also attract certain generous capital gains tax (CGT) reliefs. Owners pay CGT at the entrepreneurs' rate of 10% on a lifetime allowance of £5m, rather than the individual tax rate of up to 28% above a £10,100 annual limit. They also qualify for CGT rollover relief, where you can carry over any gains into the business and defer the tax bill.

What is changing?
In addition to the clampdown on loss relief, from April 6 next year the property must be available to be let to the public for 210 days in any 12-month period, compared with the present figure of 140 days. Also,the minimum period for which the property must actually be let will rise to 105 days from 70.

Owners must claim the reliefs on their self-assessment forms, so it is up to them to ensure that they have let their properties for the requisite number of days.

Revenue & Customs can open an investigation if it suspects you have not been abiding by the rules, and it has been known to scour lettings adverts for evidence.

Mike Warburton at Grant Thornton, the accountant, said: "The system will operate in the same way as it does now — through tax self-assessment forms — and will require people to police themselves.
"It will be important to keep detailed records of how long the property has been let each year, and to whom."

What if I don't comply with the rules?
In tax terms, you will be treated as though you are the owner of any buy-to-let property. Although there will be no difference in the treatment of income tax, you won't be able to benefit from the CGT reliefs on furnished holiday lets. "From my clients' point of view, these CGT reliefs are the most important element of the concessions," said Warburton.

Ronnie Ludwig at Saffery Champness, the accountant, said people with UK properties could be at a disadvantage to the rest of Europe. "Holiday periods in Britain are likely to be shorter than elsewhere in Europe given the climate — if you have a holiday home in the South of France, you are likely to find it far easier to let it for 15 weeks of the year.

"Those running skiing accommodation businesses will also find it more difficult to meet the requirement,given that the European ski season is only about 18 weeks."

So should I sell up?
The new regulations will make it less attractive to have a furnished holiday lettings business but for existing owners, the right tax planning is key.

Ludwig said: "People who own eligible properties heavy with capital gains, which they know are unlikely to qualify under the new rules, should consider selling before April. To get entrepreneurs' relief the property must have qualified for the 12 months leading up to disposal.

"However, with property values at home and abroad having fallen, it is possible a future uplift in value will exceed the 18% difference in tax."

Why is the government doing this?
To save money. Furnished holiday lettings exemptions cost the Treasury £30m each year, and reducing them would save the public purse £10m annually. The changes would also bring Britain into line with European Union law, so the perks are of greater benefit to commercial businesses rather than people who are subsidising the cost of a second home.

The key changes
Current rules
* Property must be available to rent for 140 days a year
* It must be let for at least 70 days
* If rent fails to cover costs such as a mortgage, these can be offset against other gains

New rules
* Property must be available for 210 days a year
* It must be let for at least 105 days
* Losses can be offset only against profits from another qualifying holiday let

Report by Alexandra GossThe Sunday Times.

Published: 1.8.2010