Holiday Homes

by Graeme Lovell – Tax Director of Langdowns DFK Ltd.

The furnished holiday lettings (FHL) regime has always allowed owners of holiday properties to offset any holiday rental losses against income from other sources, such as UK earnings. Until last year, the government maintained that furnished holiday lettings was a definition that only applied to properties in the UK. Then the government announced a change of stance, as restricting the properties which qualified as furnished holiday lets to those situated in the UK was a breach of EU law. Consequently, claims for loss relief - including for past years - would now be entertained in respect of all qualifying holiday lets owned anywhere in the European Economic Area..

The then Labour government realised that this would open up the floodgates for millions of pounds of tax refund claims, so they simultaneously announced that the beneficial framework for furnished holiday lettings would be withdrawn altogether with effect from 5th April 2010. On the back of fierce opposition – particularly from owners of holiday homes in the UK – the new coalition government announced in its first Budget in June that they would be reversing the withdrawal of FHL. Instead, there would be a consultation on how to change the rules which determine whether a property qualifies as a furnished holiday let, with the effect being that losses from properties which no longer qualify as such could not be offset against other types of income in the future. That consultation process is still ongoing.

Losses from furnished holiday letting do not only include the amount by which any rental expenses exceed any rental income. Ordinarily, assets housed in residential properties are specifically outside the scope of capital allowances, but the FHL regime has the effect of regarding holiday homes as though they are commercial properties. That has meant that capital allowances can be claimed on all residential dwellings which qualify as furnished holiday lets, which has brought about some unexpected results.

Graeme Lovell, a partner in Hampshire-based chartered accountants Langdowns DFK explains that “... many properties in Europe that now qualify as furnished holiday lets were purchased before capital allowances were available in respect of them. Now that those capital allowances can be claimed - no matter how long ago they were purchased – there is scope for all these owners to make significant claims for tax refunds. Typically, between 15 and 35 per cent of a holiday property’s purchase price comprises assets which qualify for capital allowances. These increase the tax losses massively. By way of example, if the capital allowances within a property costing, say, £200,000 were 25 per cent of the purchase price, the UK tax refunds could be as much as £25,000. The trouble is, the work associated with establishing how much of a property’s purchase price qualifies for capital allowances is outside the abilities of most taxpayers and their advisers, as it requires an in depth expertise in valuation work, and knowledge of both specialist capital allowances legislation and the working practices of HMRC’s Valuation Office. That is where we come in ...”.

The government have announced that the current rules will remain in place until at least 5th April 2011, but that the criteria for eligibility are then likely to exclude many properties. “... The most likely way this might be achieved is by raising the number of days that the property is actually occupied by paying guests as a holiday home ...” adds Lovell. But the message is clear - anyone who owns a holiday home anywhere in the UK or in the European Economic Area should make a claim now, before their entitlement to do so is potentially withdrawn.

Contact Graeme Lovell