Owners of holiday homes in Europe could have the opportunity to apply retrospectively for tax rebates previously only available for UK holiday lets. We explain what the new rules mean.

What exactly has the government announced in relation to holiday lets?

Under changes announced in the budget, holiday lets in Europe will now be granted the same tax breaks that apply to UK-based lets, but only until April 5, 2010.

Landlords with income from furnished holiday accommodation in the UK are given various tax advantages which enable them to write off any trading losses from their second properties against their other income. So, if their expenses and interest on any mortgage are greater than the income generated by the holiday let, this can be offset or the loss carried forward and offset against future letting profits.

They can also roll over capital-gains tax (CGT) to reduce their overall tax bill. For example, if you reinvest within three years in another UK holiday letting property or certain other assets costing the same as or more than you got for the property you have sold, you may be able to defer payment of CGT until you dispose of those new assets.

Another benefit was that until April last year you paid less CGT when you sold a property used for holiday lets, because the property was treated as a business asset for the purposes of taper relief. This cut the CGT rate from 40% to just 10% if the asset had been owned for 10 or more years.

Following the budget, UK landlords with income from holiday lets elsewhere in the European Economic Area will now also temporarily qualify for this beneficial tax treatment.

Temporarily? Does that mean these tax breaks are going to disappear?

Yes. The bad news is that these tax advantages will be removed for both holiday lets in the UK and in Europe with effect from next April 5 so nobody will benefit after that.

Why is the government doing this?

Having different legislation applying to holiday lets in the UK and in Europe may not be compliant with European law. To grant the same reliefs to the UK and abroad would cost the £15m.

Am I liable for tax abroad?

If you have already paid foreign tax on your letting income, you usually offset this against the UK tax you’ll have to pay on it. The amount you might be able to get back in the form of a refund will always be relative to the amount of UK tax you have paid. You can’t get any rebate on foreign tax. This means that if once you have offset any tax already paid abroad there is no UK tax to pay, you won’t be eligible to claim a refund.

How do I go about taking advantage of the rules before they disappear?

The extension of relief to EU areas applies retrospectively. This means that some people may be able to claim business-asset taper relief on overseas property that they have sold and may already have paid tax on.

Mike Warburton, of Grant Thornton, the accountant, said: “They could also be able to claim loss relief and capital-gains tax roll-over. Revenue & Customs has said it will accept late amendments to 2006-7 tax returns by July 31 this year and may accept late claims by letter as far back as 2003-4.”

How do I make an amendment to a previous tax return?

There’s no special form for making an amendment — you’ll just need to write to your tax office and give the details.

Do all furnished holiday lets in Europe qualify for this tax treatment until April 2010?

No. In order to be eligible the business must be commercial. The property must be available for letting as holiday accommodation for at least 140 days during a 12-month period, and has to actually be let for at least 70 days. Lets must be shorter than 31 days.

Warburton said: “The biggest problem for people will be proving they meet all the necessary criteria.”