What Are The Legal Implications Of Letting a Holiday Home

Laws and taxation are complex issues - there is no substitute for good professional advice from a qualified accountant with experience of local letting.

There are serious consequences for ignoring UK and EU laws and taxes. Europe is clamping down on tax evasion and Customs and Excise now work closely with EU states to catch UK residents offering holiday property rentals abroad illegally.

i   Paying Tax On Your Holiday Home

In the UK, you pay Council Tax on any property you own, whether it is occupied or not. However, reductions are available depending on the area, whether you are eligible for business rate charges, or Small Business Relief.

If you live in the UK but gain rental income from a property in France or Spain, you'll pay taxes in both the UK and those countries - in effect, two tax returns. Luckily, the good news is on any overseas taxes you pay, you can now apply for Double Taxation Relief for credits in the UK.

Tax charges can vary in Spain and France owing to localised systems. France in particular, has some very complicated reductions systems - check with a local specialist accountant. In both countries you'll pay Rental Income Tax (25%) and some degree of local property tax for municipal services, property taxes based on your property's rental value, and a Wealth Tax - only applicable in France if your assets currently exceed 760,000 Euro. Much of France also levies a tourist tax (a few cents per day) which you can pass onto your tenants or include in your overall rental rate.

ii   Inheritance Tax (IHT)

In the UK, properties used as holiday-lets are often regarded as 'business assets' and usually qualify for 100% business asset relief. However, inheritance tax can also apply to UK-owned properties in France or Spain. Inheritance tax can be exorbitant in Spain and extremely complicated to calculate in France.

It is advisable to make out another Will in Spain or France, as a Will written in the UK may not apply there. Again, take specialist advice from a local lawyer or accountant in the country itself!

iii Capital Gains Tax (CGT)

In the UK, the amount of Capital Gains Tax on the sale of your holiday home varies depending on your tax position - see your accountant. Be aware though that you are liable for Capital Gains Tax in the UK on foreign property sales, even if you've paid it overseas. Capital Gains Tax is high in Spain (35%), with other hidden taxes to look out for. In France, CGT is variable (upwards from 16%). In both countries, the longer you own your holiday home, the better.

iv VAT

In the UK, the legal threshold for VAT registration is £60,000 total income p.a. before deductions. You may be liable to pay VAT raised on letting property to France or Spain - it's important to do some homework on the local VAT regime with the help of a qualified accountant.

v Taxable Profit

For both UK and overseas rentals, you're taxed on the sum of your annual rental income minus expenses and tax allowances. If your UK property qualifies as a 'Holiday Letting' (check the Tax Office criteria), your rental income may be taxed differently.

vi Allowable Expenses

In both the UK and overseas, deductions are generally similar and include anything related to using property to make a profit - loan payments, rates, professional fees, capital expenditure, maintenance, service charges etc. Your travel expenses and air flights to overseas holiday homes can be claimed, providing they're for 'business' reasons (i.e. to check on the condition of your property and perform essential maintenance etc.), so make the most of this.

vii   Insurance

Check out specialist companies in both the UK and overseas for standard buildings/contents, accidental damage, and especially public liability and employer's liability to protect against claims by people injured whilst in your property. Take time to research the cover offered for lost earnings, cancellations, flood/fire and other natural disasters - and remember many policies don't cover property that remains unoccupied for 30 days or more. ALWAYS read the small print!

 
 
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