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  1. Property
June 13, 2012

Tax Relief on Holiday Homes: The Good and the Bad News

By Spear's

Vat Out of Hell

Ross Clark on the infuriating tax legislation that’s turning the potentially attractive option of owning a furnished holiday letting into something less alluring than a rainy week in a Skegness B&B
sorts of enjoyable holiday: the sort where you strap on your skis or take to the beach, and the sort where you take a break from the taxman. So much the better if you can take both at the same time.

You can. It’s called owning a furnished holiday letting. And for the taxman it’s a holiday that just seems to get worse and worse: a bit like the one where you turn up and find the luxury hotel as depicted in the brochure is in fact surrounded by a building site and bulldozers and jackhammers in operation from dawn. As for the owners, it’s a holiday that they — or rather their heirs — can carry on enjoying after their death. A ruling by the first-tier tax tribunal in February confirmed that yes, so long as you fulfil the minimum letting requirements for a holiday let, it counts as a business asset with 100 per cent relief on inheritance tax.

Furnished holiday lettings in the UK have long enjoyed treatment preferable to other property investments, since owners are deemed to be running a business rather than simply owning an investment. As a result, it has been possible to offset business losses against other income, and when selling a property it can be treated as a business asset, liable to 10 per cent rather than 28 per cent capital gains tax. It’s also possible to claim capital allowances on furniture and other fittings — something which is not possible on ordinary buy-to-lets.

In 2009, a court ruling decreed that British tax authorities were not permitted to treat owners of foreign holiday lets any differently from owners of those in Britain. The government was forced, therefore, to extend any tax advantages enjoyed by owners of British holiday lets to owners of villas on the Med and ski chalets in the Alps.

It was a holiday too much for that notorious workaholic Gordon Brown, who decided that the tax advantages of holiday lets should end altogether and they be treated as an investment just like any other property. It was all going to end, in other words, like Mr Brown’s own holiday in Dorset in 2007, which lasted all of four hours before he decided to cut it short and return to Downing Street to handle an outbreak of foot-and-mouth disease.

George Osborne had other ideas. After being lobbied by the tourist industry he decided to reinstate the tax breaks, subject to a consultation. At the end of the process the rules were tightened, but owning a holiday home remains a tax-efficient investment — and, unlike owning a house in Newcastle stuffed with student tenants, it’s one you can enjoy, too.

To qualify for the tax breaks your holiday home must be furnished. There’s nothing to prevent you using it from time to time, but it must also be advertised as being available to let to the public for at least 210 days a year, and must actually be let for 105 days. It must be run with the intention of making a profit.

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The rules have been tightened up in one respect: it is no longer possible to offset losses against other income. But losses can still be carried forwards and offset against future profits on the holiday-letting business itself. In order to qualify for relief from inheritance tax the property must have been owned for at least two years and you, or someone acting on your behalf, must be offering services in excess of simply letting the property. This might include providing fresh bed linen or some form of entertainment. But it doesn’t have to be you personally who irons the sheets: these could be provided by an onsite management service, so long as you, the owner, pay for these services directly.

THERE IS, HOWEVER one area where the taxman has dug himself in — and has so far won. More developers would take advantage of the market for managed holiday lets if it were not for one snag. Planners are apt to respond to applications for developments of holiday lets by slapping on occupancy restrictions limiting such properties to holiday use only. This has implications, even if you don’t want to live full-time in your seafront apartment in Cornwall. Any new property subject to a holiday-only occupancy restriction becomes liable for VAT on first sale, adding a massive 20 per cent to the purchase price.

The taxman has refused to budge, with the result that many developments have been stifled. Newquay, in particular, is pocked with vacant sites. VAT is not chargeable on existing properties bought to be used as holiday lets. But then isolated cottages are of considerably less interest to investors because there are no management services on hand. You don’t want to spend your Saturday mornings in summer trying to organise the changeover of your holiday let, phoning around Cornwall to find a replacement for a cleaner who has taken to her sickbed.

Unless the VAT man budges, not many more developments of managed holiday lets will be built in the near future. Who wants to buy a property knowing it’s effectively going to lose an instant 20 per cent of the price they paid for it? VAT is the one black cloud spoiling this tax holiday. It’s rather as if a spiteful VAT man has come and put his foot right in your sandcastle.
Read more by Ross Clark

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