Owners of holiday homes and second homes have been hit by 'technical' tax changes hidden in the budget. The tax changes may mean rents becoming more expensive for tenants and is fewer numbers of property investors entering the second home in holiday home markets. The tax changes relate to deferring capital gains tax payments or offsetting losses made on their property investment, against their personal income.
The changes come into effect at the beginning of the next tax year in April and will mean that property investors will potentially face higher tax bills in future. As the rules currently stand, people that have a large capital gains tax bill following the sale of assets such as shares all their personal personal home, can defer paying this money if they buy a holiday home, until after they sell it. additionally, second homeowners who made accounting losses could offset this against a personal income causing a reduction in total tax owed.
Currently the tax rules state that in order to attract the current tax benefits, (i.e. a second home is technically classed as a holiday home), it must also be let out at least 70 days the year. In addition, the property must be furnished and run as a commercial business and available to be rented by the public for at least 140 days a year. The move is likely to anger tens of thousands of people - many of who based retirement plans on the current tax rules for second homes. Small silver lining, those owning homes within the EU, but outside the UK, will get the tax benefits currently enjoyed by owners of UK holiday homes until April 2010. HM Revenue and Customs said it was extending the tax benefit to those owning holiday homes inside the EU but outside the UK until next April because it feared it was unlawful to have the current discrepancy.
At a time when property prices are falling and confidence is at a record low, the government has provided yet another disincentive for entrepreneurs to invest in property market. The failure of government intervention releasing equity from the mortgage market to stimulate new mortgage approvals is causing falls in property prices in residential homes as well as second homes and holiday homes. ironically, the new tax changes may mean that holiday home owners choose to sell their property before the tax changes come into effect on April 5. If you sell before April 5 you will be able to claim entrepreneur's relief ( which means gains of up to £1 million attract a lower rate of capital gains tax). The drive towards increasing all forms of taxation to pay off government borrowing is this incentivising innovation and entrepreneurial flair.
Landlord investors in overseas holiday lets are now less likely to want to invest in a business proposition that means they will end up paying more tax, related to their overall net income. The residential housing market is already on its knees. what is really required tax incentives to encourage investment in UK holiday homes and overseas property investments. few would disagree with the government in that confidence can only be restored when people begin to spend money again.. surely it is sensible to slash government spending and reduce taxes to allow private investors to spend a greater proportion of disposable income.
The government has quite simply failed to grasp how people are motivated to invest and take risks. Endlessly taxing people only results in fewer investments and less tax revenues coming in as a result. There is no doubt the difficult choices between slashing public spending and increasing taxation are equally unpalatable to the voting public. For an economy built on the housing boom and reliant on services industries, the price sensitive consumer simply can't stand any more direct or stealth taxes inflicted upon their confidence levels.
Many people coming up to retirement age are now thinking there is no real incentive to buy a holiday home in UK or abroad as for the prices are likely to concede to fall in the short term. Many dream of a life abroad, sunning themselves in popular destinations such as Spain or Italy. For people choosing to move out of major UK cities and retire in their second home in the countryside, the ability to raise equity against their own property is becoming more more limited as well.