Holiday homes targeted by new government tax proposals

Money Talk by Stephen Barratt
James Cowper accountants

  • Published
Image caption,
The changes will affect the taxation of homes abroad as well as in the UK

The dream of owning a holiday home, in the country or by the sea, is likely to look considerably less attractive as the government begins to crack down on the tax advantages of owning furnished holiday lets.

In its emergency Budget on 22 June, the new coalition government, much to the relief of many, reversed the previous government's decision to remove major tax benefits of owning furnished holiday lets.

Yet on 27 July, it announced its own measures to ensure that the tax benefits are not abused, by proposing a dramatic increase in the number of days a home must be let in order to qualify.

At present, a property only has to be available for letting for 140 days, and actually let for just 70 days in any given year, before the owner qualifies for beneficial tax treatment.

This includes:

  • the ability to offset excess property expenses, including mortgage interest, against other income at the landlord's highest rate of income tax
  • a capital gains tax (CGT) rate of just 10% on profits realised on the sale of the property
  • the ability to defer CGT by reinvesting into new qualifying property, and to make gifts within the family without a CGT charge.

The changes

The current conditions are not particularly onerous and the benefits considered generous, leaving the holiday home free to be enjoyed by its owners, family and friends for a large part of the year.

The government, in a consultation document announced on 27 July, is suggesting that a holiday home must now be available for letting for 210 days and actually be let for 105 days.

This would restrict the amount of time the owner can use their own property and increase the occupation by the rent paying public.

The consultation is also recommending that the option to offset losses arising from the running of the holiday against other general income be removed altogether.

The consultation also covers holiday homes owned by UK taxpayers across the 30 countries in the European Economic Area and some of the most popular holiday destinations, including Spain, Italy and France.

It is just a consultation and so there is still an element of having to wait and see what the final rules might be.

But change does seem to be in the air and it is certain that the new rules, if implemented, will impact affordability for those owning or looking to buy a holiday home.

Up for sale

Experts believe that, if the changes outlined in the consultation document are adopted, many holiday home owners will choose to sell up in advance of the April 2011 implementation date.

If a significant number of holiday home owners come to the same conclusion, we may see a glut of properties come onto the market in holiday hotspots both in the UK and overseas.

The Treasury suggests that there are some 65,000 furnished holiday homes that could fall foul of these proposed changes.

The preferential CGT rate of just 10% on the sale of furnished holiday lets, compared with the usual rates of 18% and 28%, is also likely to play a big part in any decision to sell.

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, though this is not affected by the proposals.

Depending upon the scale of the business and the timing of the sale, it might be that a sale after 5 April 2011 will still qualify for the 10% tax rate.

But the rules are complex and so those looking to hold on to the property beyond that date, but still benefit from this favourable rate, should seek proper professional advice.

The consultation period ends on 22 October and further information should be available shortly thereafter.

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