Tax changes on your property’s Furnished Holiday Lettings

Peter Esders

Recent changes in the Furnished Holiday Lettings rules have brought rental properties both in the UK and abroad to the forefront of people’s minds. Solicitor Peter Esders of Chebsey & Co explains how this can affect property owners

Effectively, these changes mean that there will be less tax breaks on Furnished Holiday Lettings (whether in the UK or abroad) and some of the criteria have been tightened up.

There are many people who own foreign property and rent them out. In my experience these people generally fall into two different categories. The first is the pure investor. They buy property purely for profit in terms of both Capital Gains and also income.

The second is the sort of person who would buy their first ‘second home’ abroad for their own personal use but then decide that they could offset some of the cost by renting it out. I can understand the second type of buyer getting confused about their tax obligations when they rent out a property abroad but there really is no excuse for the first type of investor not fully understanding the situation before they buy.

Paradise? Yes, but if other people rent your home in the sun, don't forget to tell the tax man

Having said that, it is amazing how many people either have selective amnesia or selective understanding when it comes to foreign rental property. I often see people who try and play one country off against each other. When they are abroad, they say things like: “I live in England and therefore don’t have to pay tax here,” whereas back home they say things like: “The property is abroad so I don’t have to pay tax here.”

They may be able to fool themselves that this is the case. They may also fool the people that they tell, but the tax authorities won’t listen to this sort of argument.

The situation does vary slightly depending on which country or countries you are talking about but overall the rules are basically the same.

• If you rent out a property in another country then you should be declaring that income in that other country and paying tax on it in that country.
• You should also declare the income in the country where you are tax resident (generally where you are living) and pay tax in that country as well.

“That doesn’t seem fair,” I hear you say. No, it isn’t – hence that’s why double taxation treaties exist. Basically, different countries have agreements whereby you can generally offset the tax paid in one country against the tax due in the other so that you only pay any extra amount due rather than the whole amount again. The tax treaties do work in slightly different ways so it is important to understand what the impact will be before buying.

So what happens if, for example, you have a Spanish property and only rent it out to English people and receive the money in England. Well, you have still received an income from the property and therefore should declare the income in Spain (and in England). Of course some people in such a situation would conveniently forget to tell the taxman in Spain.

Honesty is still the cheapest policy when it comes to renting your home

They are the same sorts of people who are surprised when the tax authorities send them the price list and availability information downloaded from their own website and ask for the tax on the weeks that they have told the world that they have already rented the property for!

Then the authorities want to go back several years and charge fines and interest and these people feel hard done by. Put simply it is just not worth it – even if it does mean that you have to pay some tax.

Luckily it is not all bad news. If you arrange your affairs properly when you buy and take advice you can make significant legal savings in tax, but it is vital that you take this advice before you buy as otherwise some of the options may not be available to you. As ever it often means paying out some money to save even more money in the future.

Peter Esders is a solicitor at Chebsey & Co and can be contacted on tel: 01494 670440  Fax; 01494 670276  Email: pje@chebsey.com Web: www.chebsey.com