Holiday Home Abroad? – Save some tax

Q:I have been renovating a house in Spain for my own family to use but also want to let out through an agency. How will this work for tax purposes?

A:There are basically two main tax treatments, either the property will be treated under the buy-to-let rules or much more beneficially under the Furnished Holiday Lettings (FHL) rules. In both cases there will be an adjustment to take account of your personal use of the property.
The tax treatment of Furnished Holiday Lettings (FHL) has been advantageous for many years. Up until a few years ago, this only applied to UK properties, but legislation has now been brought in to extend this to properties in the European Economic Area (EEA) which includes Spain.
Provided that certain conditions are met, FHL’s are treated as a trade. This can be preferable to the tax regime for normal buy-to-let property in a number of specific areas, as the rules and reliefs for trades are more generous.

Q:What are the conditions which apply for the property to qualify as a FHL?

A:There are new strict conditions, based on the potential and actual letting of the property.
The property must be:

• Available for letting for at least 210 days a year and
• Actually let for at least 105 days.

There are also rules which prevent long term occupation by one customer/tenant from qualifying.
These criteria are a lot stricter than previously and to take account of this a ‘period of grace’ has been established, which means if the rules are met in one particular year, you can elect, even if the conditions are not met for the next two years to quality.

Q:And what exactly are the benefits?

A:From next April the main benefits are the beneficial Capital Gains Tax treatment on ultimate disposal and, during the letting period the ability to offset a much broader range of capital allowances against the income you receive. Capital allowances are types of tax write off which apply to, for example:

• Heating and air conditioning equipment
• Swimming pools
• Kitchens and sanitary ware
• Furniture, furnishings and bed-linen etc.

When renovating your house, your expenditure on these type of items may have been quite substantial.
To support your claim you should ensure you keep good records of lettings and of expenses. As always good tax advice will be essential.