Keen readers of this blog will have noticed several articles over the last 18 months regarding changes to the tax treatment of holiday lettings.

The first of these was UK Budget Bombshell for Second Home Owners (April 2009). This article highlighted a proposal hidden away in the small print of Alistair Darling’s 2009 Budget. This was designed to stop the beneficial treatment of income from letting out UK properties for holidays as this was claimed to be against EU law. However in my view it also opened up the possibility, at least for a year or so, that owners of properties outside the UK could make retrospective claims on the basis that the EU was saying they had been discriminated against by not having the same tax treatment.

This proved to be the case and in June 2009 I published an update Act Now to Reclaim Tax on Holiday Homes in UK or Europe. This article explained that HMRC had accepted that there was a potential for UK taxpayers to reclaim tax as far back as 2003 for properties situated anywhere in the European Economic Area but also that rather than continue to allow this treatment in respect of all properties the beneficial treatment would end in April 2010.

Ever since the 2009 Budget there has been severe criticism from organisations involved in the tourist industry, as well as rural MPs, of the whole decision to end what was seen as a sensible and worthwhile tax break which encouraged owners of second homes to let them out to holidaymakers so as to encourage the tourist industry.

However, the Labour government (which had few MPs in rural areas) seemed to be more concerned with the possibility that extending the tax breaks to properties situated in Europe would lead to a loss of tax income. I doubt if anyone ever worked out the figures but I suspect any loss would be minimal. After all, owners of properties situated in any European country must first pay any tax due there. Only if that tax were lower than that which would be due in the UK would the UK Treasury have any claim. In contrast if the tax paid in Europe is higher than in the UK then no refund is available. Some owners would no doubt be able to reclaim tax paid but much of that would be from the tax authorities in the country where their property was situated. People with properties in the UK and in Europe would have the best chance of getting money back from the UK Treasury and there might be some Capital Gains Tax savings, but in the general scheme of things I didn’t see a great loss to the UK Treasury.

As mentioned in my article of 22nd June Consultation on Taxation of Furnished Holiday Lettings, in his emergency Post Election Budget George Osborne announced that the existing rules, which were due to have ended in April 2010, would be extended for a further 12 months whilst a consultation paper on the future taxation of holiday lettings was carried out over the summer.

This consultation has now taken place and the government has just confirmed the treatment of holiday lets for the purposes of tax going forwards. Perhaps most surprisingly, but also very generously, the changes will be applied in two stages

Changes to be Applied from April 2011

To restrict the use of loss relief from Furnished Holiday Lettings (FHLs)

When the proposed changes are made in the 2011 Budget, holiday home trading losses will only be able to be offset against future profits from the same business. Under the existing rules, owners can offset trading losses from a holiday home against any other sources of income. For a profitable holiday let business loss relief is not a huge concern, however for new entrants and farmers who currently offset losses against farm or other income it could be.

A “period of grace” will be introduced to allow businesses that don’t continue to meet the actual let period for one/two years to elect to qualify throughout that period. This will essentially help those that struggle to meet eligibility criteria year on year, allowing them time to get back on track and supporting their ambitions to be a thriving holiday let business.

Changes to be Applied from April 2012

To raise the eligibility thresholds

To qualify for FHL tax breaks owners must let a property for an annual minimum of 105 days/15 weeks (raised from 10 weeks) and the property must also be available to let for an annual minimum of 210 days/30 weeks (instead of 20). This will allow new entrants to the holiday home industry, and those currently struggling to meet the criteria, a significant amount of time to focus their marketing, in order to increase their occupancy.

Property owners should contact their accountant or tax advisor or, if they prefer, can get further information from James Green & Co who offer a free 30 minute telephone consultation.

See Also 

Category: Property Tax


One Response to “Future Tax Treatment of Holiday Lettings of UK and European Property”

  1. David Chang says:

    A most useful and timely set of articles. Thank you.

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