Tax breaks in the balance

THE calling of the General Election provided an unexpected 11th hour reprieve for the tax breaks enjoyed by many of those who rent out a holiday home in Europe. With the new government's emergency Budget due to be published on June 22, it will become clear whether the reprieve will be a lasting one.

Until April 2009, only owners of holiday homes in the UK benefited from tax breaks under the Furnished Holiday Letting scheme; but the previous government announced that it was immediately extending the benefits to all qualifying properties in the European Economic Area, to satisfy EU law, and would then abolish the scheme altogether in April 2010. However, to get its Finance Bill through in a hurry before the election in April 2010, the Labour government had to drop the second part of its plan.

The Conservatives had previously said they would reverse the abolition anyway, but with a large public finance deficit to be plugged, it remains to be seen whether they will stick to their guns.

To qualify under the Furnished Holiday Lettings scheme, a property has to be available for letting 140 days a year, be actually occupied by paying guests for at least 70 days, of which no one can stay for more than 31 days, and be properly furnished for guests. In return, there is a range of benefits, including capital allowances for equipment and refurbishment and lower capital gains tax on selling. Most importantly for many owners, you can offset any losses from the property against your other income, including your salary, for tax purposes.

So if your house in Tuscany ends up costing you a net £5,000 a year after letting income, you can lop £5,000 off your other earnings before you start to pay income tax.

Whether the new Tory/LibDem coalition will leave these benefits in place is finely balanced. There's a clear need to raise more taxes, with capital gains tax among the favourites for an increase; but on the other hand, tourism groups in the UK such as the Tourism Alliance, have lobbied vociferously for the rules to be retained, to protect our domestic tourism industry. Tourism Alliance chairman Ken Robinson said before the election: "The decision not to repeal the FHL rules move is good for the UK tourism industry.” But if the scheme is kept in the UK then it has to be kept in Europe, for the sake of harmonisation. So watch this space.

Alexander Garrett is a freelance property writer who contributes regularly to The Observer and British Airways' Business Life.