Taxing Times Aug 10

I own a property in Spain that I let out to holiday makers. I understand the tax rules have changed on this in the last budget, can you explain what the changes are?

Answer:

Holiday home owners would have been pleased with the announcement made by the Chancellor in his Budget statement that the favourable tax rules for Furnished Holiday Lettings (FHL) will continue under the coalition Government.

The Chancellor said: “There are many small businesses in the tourism industry today. To help them, I am reinstating the favourable tax rules for Furnished Holiday Lettings, which our predecessors had planned to repeal.”

But in order to ensure that the special tax rules are both in line with EU law and are ‘fiscally responsible’ for the future of the economy, the Government has called for a consultation of the current rules. The Government proposes to achieve these goals by changing the eligibility thresholds and restricting the use of loss relief, and to apply these changes at the start of the 2011/12 tax year next April.

FHLs enjoy a number of tax advantages over buy to lets. This is because, essentially, they are treated as a trade and, as such, benefit from reliefs generally available to trades, such as the ability to offset losses against other income, entitlement to capital allowances and Capital Gains Tax reliefs.

To qualify, the property must be in the European Economic Area and be available for holiday letting on a commercial basis for at least 140 days in the tax year; actually be let for at least 70 days; and individual lets should not exceed 31 days and the holiday home must not be let to the same person for more than 31 days in the year.

The rules governing FHLs were due to be withdrawn from 6 April 2010. However, the timing of the election, and the limited time in which to rush the Finance Act 2010 through Parliament, granted FHLs a reprieve as the proposed changes were not implemented.

The previous government had planned to repeal the FHL rules because they did not comply with European Union regulations. The rules did not comply prior to 6 April 2009 because only UK property could qualify rather than any holiday property in Europe. The Labour government was forced to include all holiday property in Europe for 2009/10. This will now continue for a further year.

Any reader interested in discussing this topic further can telephone Graham Jennings on 01344 875000 or email graham.jennings@kirkrice.co.uk

Answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.