The following editorial is from the latest issue Holiday Villas & Cottages Magazine:

The government has published a consultation document on changes to the way holiday rental businesses are taxed, which could have a big impact on anyone owning and letting out a holiday property.

The favourable tax treatment of earnings from commercially let holiday homes in the UK and the rest of the European Economic Area (the EU plus Iceland, Liechtenstein and Norway) owned by Brits (officially termed ‘Furnished Holiday Lettings’) had been due to end in the current tax year, but in the emergency budget following the election, the new government announced the extension of the old rules until at least April next year.

However, the new Chancellor said he would be tightening the rules considerably from April next year and the Treasury’s consultation document now explains how. According to the government, the consultation is “aimed at companies and individuals who operate furnished holiday businesses with properties in the UK or Europe, people and businesses linked to the tourism industry and tax professionals,” and the purpose is to “change the tax rules for furnished holiday lettings so they meet EU legal requirements in a fiscally responsible way.”

You can view the whole document at:

http://www.hm-treasury.gov.uk/consult_holiday_lettings.htm

The main proposals are:

• To increase the minimum period over which a qualifying property is available to let to the public during a year from 140 to 210 days
• To increase the minimum period over which a qualifying property is actually let to the public during a year from 70 days to 105 days
• To restrict the use of loss relief from furnished holiday lettings so it can only be set against certain income from the same business.

The consultation seeks views on the impacts of these proposals, and is an opportunity to influence the detailed policy implementation. The consultation runs until 22 October 2010, and responses should be emailed to holiday-lettings-consultation@hmtreasury.gsi.gov.uk

The rest of the rules are kept broadly the same, but one point worth watching is that although longer letting periods of over 31 days – typically long winter lets to retirees – are allowed, they cannot be counted towards the 105 days minimum holiday lettings.

The Furnished Holiday Letting rules will apply equally to properties wherever they are in the European Economic Area, but properties in the UK and the rest of the EEA will be treated as separate businesses, so if you make a loss on an overseas holiday property you won’t be able to use that to reduce the profit and tax on a UK holiday property, and vice versa.

We’ll keep you informed on any developments, but in the meantime, here are a few things to remember:

• The proposed 105-day rule could well trip up owners who have a poor year and see their lettings fall below 15 weeks. The resulting unexpected tax liability would in effect hit these businesses while they’re down.
• We believe that if the increase from 70 to 105 days is implemented, then the first 30 days of any long winter lets should be allowed to count towards the 105 days.
• Under the proposals, it will no longer be possible to set losses arising from Furnished Holiday Lettings against other income. This will hit private owners of a property who haven’t been receiving enough rental income to cover all their holiday property costs, and have been claiming the resulting loss against personal tax.
• It looks as if there is no change to the current situation where if you sell the property for more than you paid for it, you are able to avoid or reduce any resulting Capital Gains Tax liability by either immediately reinvesting (known as ‘rolling over’) the gain into a further property or business asset, or by claiming entrepreneur’s relief.
• You will still be able to count spending on ‘plant and equipment’ for the house as capital expenditure (which means you can claim a portion of it against tax), but only as long as you meet the 105 day rule. There’s a big question mark over what happens if you fail to meet the rule.

The more owners who read and respond to the consultation document, either directly or by writing to their MPs, the better. In particular, we believe genuine long winter holiday lets should be allowed to count towards the minimum qualifying period. The document poses nine questions for which it seeks responses from affected businesses.

If you think you will be affected by any of these changes, or want advice on how you should act, you should speak to your tax adviser or accountant.