A shock announcement in the small print of this year’s budget has left thousands of UK farmers and second home owners reeling at the loss of tax breaks without which they may have to sell up. Not a good thing in a falling market. But it could benefit owners of foreign holiday property.

Buried deep in the detail of the Budget on the HMRC website is the bombshell that from the 2010-11 tax year the special tax privileges designed to encourage landlords to provide furnished holiday lodgings will be scrapped. This isn’t something which Mr Darling spoke about which is perhaps just as well for him. As his fellow MPs get stick for their over generous “second home allowances”, Mr Darling has hit the pockets of second home owners and farmers, perhaps on the basis that they are too rich anyway.

Back in 1983 favourable tax rules were introduced in order to boost the provision of tourist accommodation in the UK. These rules apply to furnished holiday accommodation, which is the letting of houses, flats or cottages in the UK for short periods. To qualify for the special treatment, properties must be let for at least 10 weeks of the year, and be available for letting for 20 weeks of the year. Normally they should not be let for more than 31 days to the same person.

One of the main tax advantages is that the taxman allows owners of the property to offset the costs against other income, such as employment income, reducing their overall tax bill. They can also claim capital allowances on equipment and furniture, which is not possible in respect of investment properties, and there are advantages on Capital Gains Tax and Inheritance Tax mainly because the letting of a holiday home is treated as a trade rather than as an investment in property.

There is no doubt that the availability of this tax break enabled many people to purchase second homes for their own use and recoup some of the cost by letting the property out with a proven benefit to the tourist industry which is estimated in hundreds of millions of pounds.

With more people now likely to take holidays in Britain one wonders why this decision was slipped in now. Well it seems that because the UK government only offered these tax breaks for properties located in the UK that the legislation was in breach of European Union law. The UK government had the choice of extending the tax break to UK taxpayers renting out properties in other EU countries or removing the break altogether.

Mr Darling decided to remove the tax break as, according to HMRC figures, to extend the tax break to EU countries would cost the treasury £15 a year. But according to some experts the potential loss to the tourism industry could be very much more than that. In addition, and in the present state of the economy, losing the tax break could make it uneconomic for up to 20% of owners to retain their properties and they may well have no choice but to sell up in the already depressed market.

I suppose there is one positive aspect to this. UK residents who own and rent out holiday property in other EU countries should take advice on whether or not they can make a retrospective claim and get some tax refunded. Given that the tax break is worth around £4,000 a year they could be quid’s in.

See Also

Category: Property Tax


No comments yet.

Leave a Reply