Proposed tax rules changes on second homes will have implications on rentals in Tenerife,the Canary Isles and Spain.
Proposals announced by the Government last week, on changes to the tax rules on furnished holiday lets (FHL) will also apply to the owners of properties in the European Economic Area if they are UK tax payers, warns accountants James Cowper
The changes proposed for April 2011 bring the taxation of FHL into line with EU law, whilst at the same time limiting the effect on the holiday industry, and include: An increase in the number of days a property needs to be let before it can qualify as a FHL. This will restrict the extent that owners will be able to use their second home and still retain the tax breaks.
Removing the ability to offset expenses against other income. For many this will increase the cost of running their second home. Stephen Barratt, private client director at James Cowper comments: “Currently a property only has to be let for 70 days and be available for 140 days to qualify for tax breaks under the FHL rules. These had been due to be scrapped from April 2010 but were saved in the Emergency budget on 22 June. If the current proposals are implemented, the tax breaks will be restricted or removed altogether as the letting requirements rise to 105 and 210 days respectively.
“Many in the industry think this is a way of penalising second home owners and it could force many to choose to sell their properties ahead of the April 2011 rule change. If many people come to the same conclusion this could see a glut of properties on the market in holiday home hotspots both in the UK and overseas.”
Stephen continues: “Whilst the thrust of this consultation will cause concern for many, property investors who operate on a more commercial basis are unlikely to be affected by the proposals as they are clearly aimed at those who let their property for close to the minimum of 70 days per annum and also use it for their own holiday benefit at other times.”
“We must wait and see what is in the detailed rules, but even at this stage we can expect them to have an impact on both the industry and property prices. It will certainly impact the affordability for those who are thinking about purchasing a second home.”
The headline rate of capital gains tax is 28% for higher rate taxpayers and 18% for basic rate payers, but the profit on a sale of a FHL generally attracts a rate of just 10%. There might also be an element of main residence relief in the case of a second home where the necessary tax election has been made. Depending upon the scale of the business and the timing of the sale, it might be that a sale after 5 April 2011 will still qualify for the 10% tax rate. The rules are complex and so those looking to hold on to the property beyond that date but still benefit from this favourable rate should seek proper professional advice.
Stephen Barratt concludes: “As always the detail in the legislation is crucial and at this stage we only have proposals for consultation. That said, change is in the air and it seems clear that the coalition government is looking to raise the bar before the owners of these types of properties get the tax benefits of ownership. I would urge anyone with a holiday property, or looking to buy one, to keep a close eye on developments over the coming months and on the impact any changes will have on their individual circumstances and plans. The consultation period ends on 22 October 2010 so more detail should be available shortly after.”
Clearly this will have an impact on those who own or are looking to buy with rental income in mind in Tenerife, the Canary Isles and Spain in the not too distant future.
