Property investors are being warned to keep an eye out as furnished holiday let tax is due for a huge overhaul in the next budget.
Around 20,000 owners will lose tax breaks that let them set off holiday home losses against other income.
The shake-up will also see the creation of UK and overseas holiday letting businesses along the lines of current buy to let rules.
The Treasury says the new rules will bring UK tax law in line with European law from 6 April, 2011 for individuals and 1 April, 2011 for companies.
The changes mean holiday homeowners should plan now to make maximum use of tax breaks before they are scrapped in just a few months.
The main proposals are:
- To increase the minimum period a property is available for letting from 140 to 210 days;
- To increase the minimum period over which a property is actually let to the public from 70 to 105 days;
- To continue to treat furnished holiday lettings the same for capital gains tax and calculating relevant UK earnings for pensions;
- Changing loss tax breaks from a UK qualifying furnished holiday lettings business so they are only available to set against future profits from that business;
- Only allowing losses from a European qualifying furnished holiday lettings business for setting against future profits from that European qualifying furnished holiday lettings business.
The new rules split a furnished holiday letting business in two along the lines of UK and European buy to let businesses.
A European holiday letting business will cover all the countries in the European Economic Area – that includes the European Union and a wider number of places such as Iceland.
The big change is only allowing the losses of one business to be set off against future profits of the same business. Current rules allowing losses to cancel out other profits will be scrapped.
Approximately 20,000 taxpayers set furnished holiday letting losses against their other income.
Capital allowances will change at the same time as tax breaks as well. By creating a new additional residential property pool to separate furnished holiday let assets from other business assets.
“This could require complex legislation,” the consultation document states. “However, allowing businesses to maintain a notional pool may be potentially less burdensome than a strict application of the existing rules.
“These would impose a valuation requirement and balancing adjustment on each occasion that the business qualified or failed to qualify for treatment as a furnished holiday lettings business.”
The last government planned to scrap furnished holiday letting tax breaks, but they survived the election and the last budget. The new government must make changes because the current rules flout European law.
The document continues: “The current rules provide beneficial treatment to taxpayers renting furnished holiday accommodation in the UK compared to those renting similar properties elsewhere in Europe.
“As a result of this discrepancy, furnished holiday letting legislation may not comply with European law.
“The government is obliged to ensure that its legislation does not contravene European law, and is committed to providing certainty of treatment for taxpayers.
“It is therefore considered unsatisfactory to leave the rules as they are. However given the benefit of this tax treatment to the tourism industry the government does not wish to repeal the rules and withdraw that measure of support to the industry.”
The rule changes are estimated to impact on 65,000 furnished holiday homeowners plus another 1,000 companies and business partnerships.
The Tourism Alliance suggests that 79 percent of UK holiday lets will remain within the rules after April 2011.
“The way taxpayers with furnished holiday accommodation in Europe calculate their profits or losses will not change,” said the consultation document. “
“Taxpayers with furnished holiday accommodation in Europe will continue to calculate their profits and losses under the property income rules if they are brought within the new rules.
“Any taxpayers with UK furnished holiday accommodation that no longer qualifies under the new criteria will also continue to calculate their profits in line with the property income rules and would still be able to claim business expenses, such as mortgage interest, rates, utilities and employees’ wages, as a deduction.”
