The Government has scrapped the previous regime’s much-criticised intended repeal of the favourable tax rules for owners who rent out holiday cottages, or, in tax-speak, who own ‘Furnished Holiday Lettings’ (FHLs). Instead, it has presented its own proposals for reform and has launched
a consultation. Changes to the FHL tax laws are needed to meet EU requirements-in particular, to extend the legislation to include FHLs in the European Economic Area (EEA).

Labour’s plans were criticised for the damage to tourism they could cause by decreasing the number of holiday cottages on the market. Current figures suggest that 500 companies, a similar number of partnerships and 65,000 individuals rent out FHLs.

The Tourism Alliance says that £1.1 billion is spent by self-catering holiday businesses and their visitors in local economies via pubs, restaurants and attractions. In addition, the UK Tourism Survey states that the domestic tourism industry was worth £21.8 billion in 2009 and forecasts by Deloitte and Oxford Economics predict that the money spent by Britons holidaying in the UK will grow by 2.6% a year in real terms this decade.

The Coalition’s plans to amend rather than scrap the tax advantages relating to FHLs have been cautiously welcomed by the tourist industry. Ross Elder, managing director of Holiday Lettings, says: ‘Keeping tax treatments in the main unchanged, but tightening the eligibility criteria could be good for both the Exchequer, industry investment and the holidaying public. Common sense appears to have prevailed. These proposals are encouraging for anyone who runs a self-catering holiday home on a full-time basis, and appealing to those who are considering entering the industry.’

Although acknowledging that reform was needed to comply with EU law, Treasury minister David Gauke explains: ‘The second objective is to ensure that the FHL rules are fiscally responsible and properly targeted at commercial businesses. These rules provide support to the economy in many of the more rural and less wealthy areas of the UK.’ There are two main ways in which the Government has suggested tightening the tax rules for FHLs.

The first is that, to qualify for tax breaks, FHL owners must make their property available to rent for at least 30 weeks a year (raised from 20 weeks), and must let a property for an annual minimum of 15 weeks (raised from 10 weeks).

‘The Government had to extend the scheme to homes across the EEA,’ explains Marios Gregori,
a tax partner at accountants PKF. ‘But this means the UK taxpayer subsidising other countries’ economies, so the 15-week restriction seems fair.’ The Tourism Alliance reports that the average season for UK rental properties is longer than on the Continent-18 weeks as opposed to 11. ABTA, which represents more than 1,300 travel agents and tour operators, reckons that only 24% of European properties will meet the new criteria, whereas 79% of UK ones still will. However, Mr Gregori is concerned about the other 21%.

‘If these owners can’t increase occupancy levels to 15 weeks, will they just sell up?’ ABTA fears than a reduction of 10% in self-catering properties would lead to a loss of £200 million and 4,500 jobs from rural and seaside economies.

The other main way in which the Government proposes tightening the rule is by only allowing FHL owners to offset trading losses against future profits from the same business, rather than the existing system whereby losses can be offset against any form of income. This will hit those for whom the FHL was principally acquired to be their own holiday home, but is rented out for tax benefits.

It will also save the Exchequer money. Of the 65,000 individuals with FHL income, 35,000 made an FHL loss and 20,000 set their FHL loss against income from other sources. The Government believes the changes will reduce the cost to the Exchequer from approximately £30 million per year to £10 million.

A CLA spokesman says: ‘Overall, we welcome the pragmatic proposals suggested. But the restricted loss-relief proposal could be a problem for entrants into the industry, or those who have to refurbish a property. We are keen to explore how this restriction might operate in practice.’