Potential tax windfall for holiday home landlords in Spain

Many of the Britons who let out their second homes in Europe could now be eligible for a tax rebate windfall paid back to them by HM Revenue & Customs.

Although the most published elements of the recent Budget concentrated on tax increases, much less published is a new opportunity for owners of holiday lets in Europe, who have been given the chance to apply retrospectively for tax repayments going back up to a full five tax years. But, according to Conti, the UK’s leading overseas mortgage specialist, anyone who thinks they may be eligible should act quickly, as the tax breaks will cease in April 2010.

This change in taxation is applicable where either of two circumstances has arisen:
1. Where owners have incurred losses from the letting of the property since 6 April 2003
2. Where a property used for holiday lets has been sold at a profit since 6 April 2003

How the rebates work in practice

Example 1
Mr Smith owns a Spanish villa that, apart from a couple of weeks’ private use, is let commercially throughout the year. Whilst Mr Smith tries to let the property all year round, the seasonal nature of the business means that, year on year, a loss of around £5,000 is incurred. Mr Smith may now be able to make a claim to offset this loss against UK income tax over the last five years. As a higher rate taxpayer, this would generate a tax repayment of around £10,000 (5 years x £5,000 x 40%).

Example 2
Mrs Jones acquired a holiday property in Portugal in 2001 for the equivalent of £100,000. The property was let out for five years, on a holiday-let basis, and sold in 2006 for £200,000. She paid capital gains tax in the UK of £30,000 on the sale, after all available tax reliefs. It may now be possible to go back and amend the calculation to include further reliefs, which would reduce the taxable gain to around £2,000. This would save Mrs Jones £28,000.

Free tax review

Conti is offering property owners who think they may fall into either of these categories the opportunity to obtain a free tax review from one if its partners, Target Chartered Accountants, which specialises in UK and European tax. Target will offer clients a free initial consultation and has also agreed not to charge a fee for any tax repayment claim made as a result of the review. A fee will only be chargeable if a successful tax refund or reduction has been achieved.

More than two million Britons currently own a property abroad, and according to Conti, a number may recently have become eligible for one of these tax breaks. Many owners who previously kept their homes for private use have been renting them out to holiday makers over the last couple of years, to generate an extra source of income during the economic downturn.

Limited opportunity

This is a one-off opportunity in the 2009/10 tax year to secure a unique tax rebate. In 2010/11 the set-off or carry back allowances which create the rebate will no longer apply.* To be eligible for the allowance, properties must have been let for ten weeks a year and available to let for 140 days.

Anyone who thinks they may be eligible and would like to take advantage of the free tax review should call Mark Tuckwell at Target on 01788 539000 or email contact details to target@target-accountants.com quoting reference C99.

Opportunity to remortgage

This could also be a good time for landlords with European property to consider remortgaging. With interest rates at an historic low, the number of people looking at the refinancing options
available is increasing dramatically. In addition, the strength of the euro means that equity in many second homes abroad is now worth a great deal more when converted back to sterling. It’s also important to remember that in some countries, if you’re remortgaging a property, a percentage of the rental income received can be taken into account by the lender when calculating how much they’re willing to lend. In addition, mortgage interest may be an allowable tax expense against rental incomes.

For more information visit www.mortgagesoverseas.com

* From 6 April, 2010, furnished holiday lets in the UK will no longer be treated as business assets, against which owners can offset losses against their other income and roll over capital gains tax to reduce their tax bill. The break was originally introduced in the 1980s as a way of encouraging British tourism.

The Government withdrew the concession after the European Union ruled that it breached EU law by discriminating against non UK owners of second homes in other European countries.

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About Mark Stücklin

Mark Stücklin is a Barcelona-based property market analyst and consultant, and author of the 'Spanish Property Doctor' column in the Sunday Times (2005 - 2008). He can be reached by email on ms@spanishpropertyinsight.com.