Taxation of Rental Income from European Holiday Lets
A little known consequence of European (EU) legislation means that any UK resident owning a holiday let within the European Economic Area (EEA) must be taxed in the same way as a UK resident owning a holiday let within the UK. This means that the favourable Furnished Holiday Let (FHL) rules usually applied to UK properties alone are also available to EEA properties.
In order for a property to qualify as an FHL it must meet all of the following criteria:
- Be available to let to the public for at least 140 days in the tax year and;
- Actually be let for at least 70 of those days and;
- Must not be let to the same occupant on a continuous basis for more than 31 days.
If the property does qualify as an FHL, the rental profit/loss will be treated as a ‘trade profit/loss’ from a tax point of view for the following purposes:
- Loss relief (as discussed below)
- Capital allowances (as discussed below)
- Relevant UK earnings for calculating maximum pension relief due on an individual’s pension contributions
- Landlords Energy Saving Allowance (LESA)
- Certain Capital Gains reliefs
In circumstances where the FHL gives rise to a tax loss, some very generous and flexible tax reliefs are available. The usual rules for losses from rental properties are restrictive and only enable you to offset the rental loss against other rental profits of the same rental business in the same tax year or future tax years. The FHL rules, however, enable the losses to be utilised in the same way as a trading business, which means that in addition to the usual property loss rules above, they can also be offset against the total income of the current tax year or previous year, or in the case of a new FHL business, the previous 3 years, which can give rise to a significant tax repayment/reduction.
In addition to the above, FHL profits can be further reduced by capital allowances, which are not available to the ordinary residential rental business. Capital allowances are given as a deduction for expenditure on certain fixed assets such as furnishing and white goods supplied for the FHL, thus saving additional tax.
These rules are only available until the 2010-11 tax year as the Government have announced that consultation will take place concerning the proposed withdrawal of these rules from April 2011.
If you have not claimed this favourable treatment for 2008-09 and/or 2009-10, all is not lost, you still have time to make an amendment to any tax return submitted for those years.
The information provided here is for guidance only and if you think that you may be able to take advantage of the FHL rules in respect of EEA properties you own, you should seek further advice from your tax accountant or call one of our tax specialists at Complete Tax Partnership on +44 (0)20 8492 0031 or email firstname.lastname@example.org