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Don’t miss out on this holiday home tax break

Don’t miss out on this holiday home tax break

The clock is ticking down on a ‘use it or lose it’ tax break for furnished holiday let owners that runs out at midnight on April 5.

From the start of the new tax year on April 6, tax rules for holiday home owners change and the a special rule that lets them set off rental losses against other income is scrapped.

The rule in force until then lets holiday homeowners set off their losses against general income or other business profits.

How to save income tax by setting off holiday home losses

Any holiday homeowner with repair or refurbishment work scheduled should consider buying in the materials and paying the bills before the end of the tax year if this would create a loss that saves them tax on other income.

For example, if a furnished holiday let shows a £1,000, but is due a kitchen and bathroom refit later in the year, buying in the units and materials now for £5,000 would create a £4,000 loss.

This can be set off in a number of ways against other income – the most attractive being reducing a salary pound for pound.

A higher rate (40%) taxpayer shifting a holiday home loss against income would save £1,600 income tax by ‘creating’ the £4,000 loss.

The loss must be from revenue expenditure – so switching a like-for-like kitchen and bathroom would meet the rules.
The bill must be paid by April 5 – but the fitting can follow later.

Repair and replacement is fine – but adding, like building a new extension, loft conversion or garage would send the expense in to the taxpayer’s capital account. This would not generate a tax loss.

Any property qualifying as a furnished holiday let in the 2010/2011 tax year meets the criteria.

Holiday homes in the UK, France, Spain, Italy and Greece all come under the rules.

Permanently sited caravans and houseboats let to holidaymakers also come within the rules.

Making a claim to set off holiday let losses

The amount loss can be set against the general income of the tax year when it was incurred or the following year. So, a 2010/2011 loss can carry forward to 2011/2012, under Section 379A Income and Corporation Tax Act 1988 (for companies) and Section 120 of the Income Tax Act 2007 (for individuals).

Any claim must be in by January 31, 2013.

To a claim, a taxpayer should tell their tax office in writing that:

  • Their holiday home rental business has made a loss
  • How they are claiming the relief, ie sideways or forwards
  • The tax year when the loss was incurred
  • The tax year for when they are using the relief