There is good and bad news on the rules regarding furnished holiday property. At present, owners of qualifying UK holiday properties enjoy several tax benefits. Should the expenses of running the holiday home exceed the rental income, then this loss (provided it is commercial) may be set against other income of the owners, unlike losses arising from other property which can only be set against property income in the year or carried forward.
Furthermore, Capital Gains Tax (CGT) on a holiday home can be deferred into another holiday home, provided it is acquired within three years of selling the original home. Owners may also be able to benefit from Entrepreneur’s Relief and pay Capital Gains Tax at 10%, rather than the normal 18%. They also have the potential to claim capital allowances on the property furnishings.
The great news is that, for a short period, these tax breaks will be extended to those individuals who have qualifying holiday homes in countries within the European Economic Area (EEA) and are liable to UK taxes on the income. It may even be possible to reconsider the position in earlier years for such properties.
The bad news is that all these great tax breaks will be withdrawn from April 2010. However, at the time of going to press, the changes had not been consulted on nor included in the 2009 Finance Bill, so either the rules will be included in the legislation next year or perhaps the proposed changes may alter.
If the tax breaks are withdrawn in 2010, then HM Revenue and Customs may be inundated with claims to treat furnished holiday homes as a trade. Although treating it as a trade will create a National Insurance charge for the individuals, the resulting tax breaks may well be worth it. Unfortunately, in deciding whether the holiday homes are a trade, reliance may be placed on very dated tax cases, which are unlikely to relate to modern circumstances.
Tip: If you own a property in the European Economic Area (EEA), please get in touch. We can review the full circumstances, check that the property qualifies as a Furnished Holiday Home, and what tax benefits can be claimed.
Tip: If you are lucky enough to own a Furnished Holiday Home in the UK or the European Economic Area (EEA) that has significantly increased in value since you acquired it, then you may wish to crystallise the gain now and sell the property. There are various options to crystallise the tax depending on your personal circumstances, including selling to a limited company, or perhaps a trust.