“Give me a (tax) break!” - Government to remove holiday-home tax perks

A ‘tax axe’ is set to fall squarely on owners of holiday homes, when rules governing these properties’ tax treatment are changed, at the beginning of the new financial year, in April 2010.

Alistair Darling, the Chancellor of the Exchequer, unveiled the plans in the pre-budget report of December 2009, which will repeal the Furnished Holiday Lettings Rules. The Daily Telegraph has estimated that the current rules save UK holiday-home owners an average £4,000 each per year.

Under the existing legislation, owners of UK furnished holiday lettings have been able to offset tax, as well as other concessionary allowances on earnings derived from their holiday homes, against tax and capital allowances on other incomes, like employment income and capital gains.

In order to qualify for this UK tax break, furnished holiday lettings have had to meet the following criteria:

• The property must be a furnished holiday letting within the United Kingdom
• The property must be available to let for a total 140 days in a 12 month period
• The property must actually be let for at least 70 days during that year
• In any seven-month period, the property must not be let to the same person for a continuous period exceeding 31 days

The reason for the change is one of fairness. Because the tax exemption has only applied to properties in the UK, the rules have been found to conflict with European law.

Owners of properties in other parts of the European Economic Area* (EEA), including landlords who pay UK income and capital gains taxes, have not qualified for such allowances:

“They were treated, instead, in the same way as landlords of other types of overseas property, under the property income rules”.

- HM Revenue & Customs technical note 9 December 2009, Withdrawing the Furnished Holiday Lettings Rules From 2010-11.

The Treasury has stated that it cannot afford, on a permanent basis, to extend the existing tax breaks to owners of properties in the EEA who pay UK tax. The Daily Telegraph quotes a Treasury source claiming that the ‘only option was to remove it (the tax allowance) here’.

“From 2010-11, FHL businesses will be treated in the same way as other types of property business. Those with FHL income will no longer be treated as though their qualifying FHL business is a trade for certain tax purposes, instead they will be treated as running a property business and the normal property income rules will apply”.
- HM Revenue & Customs technical note 9 December 2009, Withdrawing the Furnished Holiday Lettings Rules From 2010-11.

It is therefore clear that the perk will cease for furnished holiday lettings and these will generally be treated the same as any property business - although some small perks will remain, such as a 10% wear and tear allowance - see HM Revenue & Customs for further details.

* Countries of the European Economic Area:

Austria Belgium Bulgaria Cyprus Czech Republic Denmark Estonia Finland France Germany

Greece Hungary Iceland Ireland Italy Liechtenstein Latvia Lithuania Luxembourg Malta

Netherlands Norway Poland Portugal Romania Slovakia Slovenia Spain Sweden United Kingdom

For further details, see:

The Daily Telegraph
HM Revenue & Customs

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