UK Widens Holiday Let Tax Net

by Robert Lee, Tax-News.com, London

05 August 2010

Proposals announced by the government on changes to the tax rules on furnished holiday lets will also apply to the owners of properties in the European Economic Area if they are UK tax payers, warns accountants James Cowper.

The changes proposed for April 2011 will bring the taxation of Furnished Holiday Lets (FHL) into line with European Union law. Specifically the changes will include:

• An increase in the number of days a property needs to be let before it can qualify as a FHL, restricting the extent to which owners will be able to use their second home and still retain the tax breaks; and
• Restricting taxpayers' ability to offset expenses against other income, for many, increasing the cost of running their second home.

Stephen Barratt, private client director at James Cowper comments:

“Currently a property only has to be let for 70 days and be available for 140 days to qualify for tax breaks under the FHL rules. These had been due to be scrapped from April 2010 but were saved in the emergency budget on June 22. If the current proposals are implemented, the tax breaks will be restricted or removed altogether as the letting requirements rise to 105 and 210 days, respectively.”

“Many in the industry think this is a way of penalising second home owners and it could force many to choose to sell their properties ahead of the April 2011 rule change. If many people come to the same conclusion this could see a glut of properties on the market in holiday home hotspots both in the UK and overseas.”

“Whilst the thrust of this consultation will cause concern for many, property investors who operate on a more commercial basis are unlikely to be affected by the proposals. They are [instead] clearly aimed at those who let their property for close to the minimum of 70 days per annum and also use it for their own holiday benefit at other times.”

“We must wait and see what is in the detailed rules, but even at this stage we can expect them to have an impact on both the industry and property prices. It will certainly impact the affordability for those who are thinking about purchasing a second home.”

The headline rate of capital gains tax is 28% for higher rate taxpayers and 18% for basic rate payers, but the profit on a sale of a FHL generally attracts a rate of just 10%. There might also be an element of main residence relief in the case of a second home where the necessary tax election has been made, the firm noted. James Cowper added that, in some circumstances, the sale of property after April 5, 2011, may still qualify for the 10% tax rate, but that professional advice should be sought.

Concluding, Barratt said: “As always the detail in the legislation is crucial and at this stage we only have proposals for consultation. That said, change is in the air and it seems clear that the coalition government is looking to raise the bar before the owners of these types of properties get the tax benefits of ownership. I would urge anyone with a holiday property, or looking to buy one, to keep a close eye on developments over the coming months and on the impact any changes will have on their individual circumstances and plans. The consultation period [on this matter] ends on October 22, 2010, so more detail should be available shortly after.”

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