Time running out to claim holiday let relief

New legislation set to come into force at the end of the 2011 tax year means that landlords are running out of time to pay less tax on their furnished holiday lets as a tax-saving relief is set to be stripped back.

Changes to valuable tax allowances on holiday lettings could mean the end to a favourable furnished holiday lettings tax code, which had narrowly escaped being totally scrapped by the previous Labour government.

Under current rules, landlords renting out their holiday properties as short-term lettings are treated as if they are trading rather than investing, which means they can offset holiday let costs against other sources of personal income.

While the relief won't be scrapped altogether, the coalition government has decided to restrict its use for furnished holiday lettings, meaning that landlords can only offset holiday home trading losses against future profits from that specific lettings business.

In addition to this, the government has raised the eligibility criteria from 2012 onwards, requiring that holiday properties be let for at least 105 days per year, up from a minimum of 70 days.

Landlords must also advertise the property as being available for at least 210 days each year, as opposed to the previous requirement of only 140 days. Additionally, holiday properties cannot be offered to any single tenant for longer than 31 continuous days.

However, landlords of multiple holiday lets can average out the days between all the properties in their portfolio to meet the requirements.

The government has also closed off other ways to avoid tax, such as renting a property to family or friends at a low price, by demanding that landlords always charge the market rate.

As an incentive, any landlords who meet the new criteria within a year will automatically be given a passing grade for the following two years, whether or not they later meet requirements during that period.

Holiday lets will continue to qualify for capital gains tax reliefs and landlords can take advantage of entrepreneurs' relief of ten per cent, rather than the personal rate of 18 per cent.

Furthermore, income from furnished holiday lettings can still be included in pension contributions.

The new rules don't come into force until the end of the 2011 tax year, so landlords are being urged to make the most of the time they have left to save significant sums.

Last January, John Davies, managing director of property tax specialists Hedge Tax and Mitigation, estimated that the soon-to-be obsolete rules allow holiday home owners to claim 20 to 30 per cent of the purchase price of their properties as capital allowances.

This means that a property bought for £250,000 could lead to a tax saving of £15,000 to £37,500.

Expectations that many landlords of holiday lets will take up the tax-saving relief before it expires remain low, with Mr Davis having warned that 97 per cent of holiday home owners were in the dark about relief as it was such as niche area of property taxation.

Further information

Published on: June 30, 2011

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