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Tax holiday cut short?

Autumn 2009

The tax break on furnished holiday lettings (FHL) will be withdrawn from the 6th April 2010. For many years , HM Revenue and Customs (HMRC) has treated the renting-out of holiday homes as a business, rather than an investment.

Among other advantages, this meant any losses could be used to reduce tax payable on other income, though overseas property did not benefit from these rules.

With limited retrospective effect, foreign holiday homes within the European Economic Area will qualify for the same tax treatment as those located in the UK. It could be worth finding out whether your property qualifies.

It may also be advisable to carry out repairs before the rule change comes in, so as to maximise tax relief. Do not, however, confuse repair costs with improvement costs, which count as capital expenditure and are not deductible for income tax. However, they can be allowed against capital gains tax (CGT) when you sell the property. This is a rare opportunity to get some tax back. Regardless of tax return deadlines, it is sensible for individuals with overseas holiday homes to get everything up to date by 31 March next year. FHL status also allows CGT charged on individuals to be reduced to just 10% by entrepreneurs' relief.

For example, Paul owns an FHL that he bought in 1990 for £100,000 and is now worth £220,000. If he sells it, the gain before any exemptions will be £120,000. The maximum CGT on this is 18%, ie £21,600, but with entrepreneurs’ relief this could be cut to £12,000.

FHLs will lose their special status, and the tax benefits that go with it, from 6 April 2010. Unless you sell your FHL by then, you may lose out on the CGT benefits. There are other ways to get this tax break without giving up all your interest in your FHL – for further details please contact us.

Hilton Sharp & Clarke