Treasury turns screw on holiday home owners

Coalition U-turn

With a change of government thousands of owners of holiday let properties and second homes had hoped that they would continue to enjoy generous tax concessions which allow them to offset losses on the letting business against other income. George Osborne, in his June Budget, said he would reverse the previous Labour government’s plans to do away with the concessions. 

 But last week new rules were published and Treasury estimates reveal that probably 20,000 of the 65,000 people with holiday letting businesses will no longer be eligible for the tax concessions after April 2011. This will save around £10 million a year in lost revenue. Relief for holiday letting currently costs the Exchequer an estimated £30 million a year and has risen sharply since April 2009 when the concession was extended, to comply with EU regulations, to include UK owners who let properties abroad within the EU.

New rules

Under the current rules holiday letting is considered a ‘trade’ by the tax man and since the mid eighties owners can offset any losses – such as running costs, mortgage interest, insurance, advertising and maintenance – in excess of the rental income, against other personal income. 

But from April of next year losses can only be offset against profits from the letting business – and to qualify as a holiday let the property must be available to rent for longer. In addition, the generous capital gains tax (CGT) concession which allows those engaged in a trade to pay CGT on selling the business at just 10% on the first £5 million of lifetime gains will be lost for those owners whose properties no longer qualify as holiday lets. For them their property will be treated as an investment, like buy to let, and subject to 28% CGT on sale of the properties.

To qualify as a holiday letting business the length of time that the property is available for rental is being extended from 140 days a year to 210. In addition it must actually be let for at least 105 days a year rather than the existing 70 days. This may not affect owners with properties in the EU too badly where the summers are longer. But UK owners could find it difficult to attract paying tenants for all of June, July, August and half of September. It will probably prevent owners of second homes from using the property for their own holidays unless they can generate sufficient rental income out of season.

An end to mates' rates

The aim is to clamp down on owners who aren’t really serious about running a holiday letting business and simply want to reduce their tax bill on other earnings and offset some of the costs of running a second home. Many owners of second homes rent out the property to friends at ‘mates rates’ and inevitably make a loss when running costs are taken into account. Relief for losses can be denied if it can be shown that the lettings are not on a commercial basis. A legal decision before the Special Commissioners in 1997, Brown v Richardson, denies loss relief to all those who keep the holiday property for their own use and let it for some time to offset some of the costs.

‘The new rules are more restrictive and a lot of people were doing this as a very tax-efficient pension scheme,’ said Patricia Mock, a director of Deloitte’s private client division. ‘Because the new rules are more restrictive in the number of days the property must be available to let and actually let, and the way in which the losses can be offset, the tax relief is now aimed at professional holiday letting businesses.’ 

Since the system is self policing and anyone engaged in holiday letting has to declare the income on a self assessment tax return, it is important to keep detailed records of all income and expenditure – and in particular proof of the number of weeks the property has been let and has been available to let. Mock also points out that holiday lets in the UK and holiday lets on properties within the EU will be treated as two separate businesses.

The upshot of these new rules is that some people – probably those who were never seriously running holiday letting as a business but just enjoyed the tax concessions – will exit the business, turn the properties into long term buy-to-let investments or sell their properties. ‘I would not have thought it will trigger an immediate sell off of second homes but I think people might try to reorganise their finances.  The way people were using this relief was to keep the mortgage as large as possible so the interest could be set against other income,’ said Mock. She believes many will now pay off or reduce their borrowings.

But it will pay to take advice on this and the CGT implications. If you own properties which are still showing substantial capital gains and you believe you won’t be able to qualify as a letting business under the new rules, you could consider selling before 5 April 2011 so that you can still claim relief as an entrepreneur at the concessionary CGT rate of 10%. To qualify the properties must have qualified as holiday lets for at least the 12 months before you sold.