TT137: Holiday Home Tax Update
Tax Relief Changes:
On the same day as the last budget the government slipped in a change to tax relief on losses from renting out holiday homes. This will impact on homes in the UK and in the European Economic Area (EEA). The EEA comprises the EU plus Norway, Iceland & Lichtenstein.
Many people have second homes and these are sometimes let out as furnished, short-term, holiday lettings. It is worth noting that such homes do not need to be in usual holiday destinations, they just need to meet certain tax rules to qualify as a business. The benefits of such qualification are:
- Loss relief can be claimed against other income in a tax year.
- Trading capital allowances can be claimed (which are not normally allowed on residential properties).
- Gains on disposal are treated as business assets for CGT purposes – not just allowing a lower rate of tax, but allowing access to business asset roll-over relief, entrepreneurs’ relief, gift relief for business assets and Business Property Relief (BPR) from Inheritance Tax (IHT).
- The income counts as earnings for pension purposes.
The basic rules for holiday homes to count under the existing legislation are:
- They must be situated in the UK.
- The business must be carried out with a view to a profit.
- They must be available for commercial letting for more than 140 days per year.
- They must be commercially let as holiday accommodation for over 70 days per year.
- Periods of letting in excess of 31 days do not count for the above limit, and you cannot have more than 155 days of longer lettings in a year.
Note that the existing rules only allow UK situated property to qualify. Furnished, holiday properties situated outside of the UK are treated the same as all other property lettings (i.e. commercial and residential) under the existing rules. These do not allow the above tax benefits.
The UK Government has bowed to pressure from the EU to stop the UK tax law applying differently between UK and non-UK situated property and the rules have changed as follows:
- The UK rules will extend to EEA situated holiday lettings, but only for a limited time until 5 April 2010.
- The beneficial rules for both UK and EEA situated holiday lettings will cease from 6 April 2010, requiring all such letting businesses to use the normal, less advantageous property income rules. (Note, holiday lettings outside the EEA will continue on the existing, less beneficial rules.)
How This Could Affect You:
If you have a non-UK holiday letting property in the EEA then you should consider the following questions:
- Could you claim a loss on your holiday letting activity that might offset against your income in the current or a prior year?
- Have you made a gain on a sale of a holiday let on which we might be able to claim a reduced rate of tax as it is now qualifies as business asset?
- Have you bought such a business asset (a holiday let) that would allow you to roll-over a gain made on another (business or non-business) asset into the base cost?
There are strict time limits for making corrections and claims.
For income tax claims you can usually amend a return up to 12 months after the 31 January deadline for the return. Therefore you have until 31 January 2010 to amend the 2007/08 income tax return (similar rules apply for corporation tax returns, depending on the accounting period date). However, by concession HMRC will allow until 31 July 2009 to revise the 2006/07 income tax return (or 31 December 2006 corporation tax return).
For CGT you can review your situation as far back as 6 April 2003 to see if you can elect for:
- Hold-over relief on a gift of the asset.
- Roll-over relief on the reinvestment of a gain into another asset.
- Capital loss relief to be claimed against all other assets (previously this was restricted to relief only against other offshore assets).
- Terminal loss relief (i.e. carrying back a income tax loss three years on the cessation of a business).
- Landlords Energy Saving Allowance.
- Taper relief on the sale of a business asset.
- Retirement Relief on the disposal of an asset (when you are over 50 years old).
- Pension contributions relief.
- Substantial shareholding relief for sale of subsidiaries holding holiday lets.
- BPR on an asset that was subject to IHT in a recent probate.
Barnes Roffe Topical Tips
- If you have had a holiday letting property outside the UK and inside the EEA in the last 6 years you should review your tax status as a matter of urgency.
- If you have a UK based holiday letting property then any loss offset against other income will cease from 5 April 2010 and you will only be able to get relief for the losses against future profits from the same property. Hence, we recommend you consider any repairs or similar expenditure in the current tax year.