New rules threaten holiday home tax perksMake Text Bigger
Second home and holiday let owners are set to lose lucrative tax breaks worth thousands of pounds in a proposed change in the law to bring the UK in to line with European rules.
The tax landscape for furnished holiday let owners has suffered from uncertainty from the government for some time.
The outgoing government pledged to scrap holiday let tax breaks in the last Budget but had to reconsider the position to push through other legislation without opposition before giving up power.
Now, the Treasury has laid out new proposals to make owning a holiday more of business than a hobby and wants to bring them in on April 6, 2011.
What are the rules now to qualify a property as a holiday let?
Firstly, a holiday let is a lot more than a second home. A second home can be a holiday let, but the tax treatment of a holiday let is more like a business than a property investment.
To qualify for special tax breaks, a holiday let has to meet certain criteria:
- It has to be available for let to paying guests for 140 days a year and actually let for at least 70 days. Those days don’t include family or friends grabbing a cheap or free break.
- The holiday let must be furnished – and furnished means someone can just turn up with a bag with some clothes and personal items and happily live there for a week or two.
- A holiday let has to be in the UK – which is England, Scotland, Wales or Northern Ireland
- No one can stay at the holiday let for more than 31 days
These rules are important because when a property qualifies, the owner can claim a special tax treatment:
- Running’s costs like mortgage interest and repairs can be set off against rent
- Holiday let losses can be set off against other income to reduce tax paid
- If the property is sold, capital gains tax is charged at 10% instead of the standard 18/28%
- Proceeds from a sale can be reinvested in a business or the property can be gifted to family with CGT deferred
What will the new rules be in April 2011?
At the moment, we know new rules will be in place from April 6 next year, but won’t know until October or so exactly what they are likely to be.
This is because the Treasury has issued a consultation document outlining some proposals but they still have to be discussed, confirmed, and adopted as law.
We do know holiday let owners will have to up their game and operate their properties in a more businesslike manner to keep their tax breaks.
The government wants to lift the bar on the qualifying period – they want holiday lets available for 210 days and let for 105 days.
The property must still be furnished but can be in the UK or the European Economic Area, which is effectively the European Union plus Iceland, Norway and Liechtenstein.
Turkey, which is one of the most popular places in the sun for Brits with holiday homes, is excluded.
The big change is the tax treatment of holiday-let losses. Until now, the rules say if a holiday let makes a loss, this can be set off against other taxable income, which is especially helpful for higher rate taxpayers.
For instance, if someone was self employed and had a taxable profit of £45,000 and a holiday let loss of £10,000, instead of paying income tax on £45,000, they only pay tax on £35,000. All the running costs of the holiday let, like the mortgage, are written off against tax as business costs.
The new proposals scrap this arrangement and say holiday let losses can only be set off against future holiday let profits.
Why are these new tax rules coming in to place for furnished holiday lets?
The last government wanted to away with holiday home tax breaks completely but backed down in a horse trade to see other legislation through before Parliament was dissolved for the general election.
The coalition still has to act because the European Union argued the tax rules were unfair because they allow UK taxpayers with holiday lets in this country special tax breaks but do not offer the same benefits to UK taxpayers with holiday lets in Europe.
The long and the short of it is if the rules weren’t changed, the EU would eventually take action in the courts.
How many people will these rules affect? How many people have holiday lets in the UK, and how many offset their losses against their incomes?
The consultation document includes an impact assessment with some figures based on tax returns from recent years.
The Treasury estimates 65,000 taxpayers own holiday homes and of these about 20,000 people and a thousand partnerships and companies set off holiday let losses against other income.
It’s difficult to say what the figures will be next year because no one really knows how many overseas holiday lets will be caught in the net.
The Treasury is working on a figure based on research of about 80% or about 52,000 taxpayers will still be running holiday lets in the UK after the changes.
Were these tax perks an incentive for people investing in second homes?
Yes writing off holiday let losses benefited a lot of taxpayers – especially those who would have been paying at 40% on other income who could bring the tax they paid back in to the lower rate by setting off losses.
What about capital gains tax? Is that going to change?
Just as important as the losses are the capital gains tax advantages that come with holiday lets.
The chancellor has already announced that capital gains tax rules won’t change in the life of this parliament. Capital gains tax on residential investments like a second home or buy to let is paid at 18% for lower rate taxpayers and 28% for higher rate taxpayers.
Holiday lets attract enhanced rates – a flat rate of 10% as entrepreneur’s relief plus other CGT reliefs that defer tax like roll over relief and gift relief.
Holiday lets that fail to qualify under the new rules will keep their special tax treatment for a while, then lose it completely, and that may prompt owners that do not want to run such an intense holiday let business to sell.
Note from The Money Centre
If you would like further advice on tax or accountancy please call The Money Centre’s Customer Care Team on 01603 894525 and they will be delighted to refer you to our Joint Venture Tax Partners who specialise in property taxation. The initial introduction is a no cost no obligation service.
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