Renting out a property in France
Some Living France readers who own holiday homes in France may be in line for a tax windfall from HM Revenue & Customs (HMRC) by claiming tax paid on rental losses from letting furnished holiday homes in France. Those who have sold a property after 6 April 2003 could be due a repayment of UK capital gains tax too.
Until the 2009 UK Budget, the furnished holiday lettings (FHL) rules allowed taxpayers who let their UK second homes for short-term holiday lets to offset ‘capital allowances’ as expenses against their tax liability on property located only in the UK, as well as offsetting the rental losses on those properties against their UK tax liabilities on other income. Now HMRC has realised that this may not comply with European law, and so, for the 2009/2010 UK tax year only, has extended the FHL rules to apply to UK resident landlords with property meeting the FHL criteria in the European Economic Area (EEA), which includes all Member States of the European Union and therefore France.
However, because widening the area of the FHL to EEA countries could cost the UK Treasury millions in revenue, the whole scheme – for both UK and European properties – is being scrapped from 6 April 2010.
It doesn’t sound like much of a benefit – only being able to claim for 2009/2010, but you can claim for losses occurring over the previous 5 years, so although the rules have only been extended for 1 year to cover EU FHL losses, those who have been letting a French property that fulfills the criteria have until 31 January 2010 to claim for any losses from the 2003/2004, 2004/2005 and 2005/2006 UK tax years. For 2006/2007 and 2007/2008, the deadline for amended returns was 31 January 2009 although there is a possibility that amended returns will be acccepted until 31 July 2009.
Rental losses occur when the costs of running the property exceed the rental income. However, if you use the property personally, any element of these costs relating to the time you and your family use the property yourselves are not deductible in calculating the loss.
For owners of French holiday homes this means that they will benefit from a year of these tax concessions, and will be able to make a claim for up to 5 previous tax years as well as for 2009/2010. A loss of £5,000 per year translates to a £2,000 per year repayment for a higher rate taxpayer (plus interest). Claims for 2008/2009 can be made to that return, by letter if a paper return, or online, if you submit an online return by 31 January 2010. For all previous years and for those who did not complete tax returns for earlier years, you need to submit your claim by letter to your UK tax office, claiming that an ‘error or mistake’ was made.
For properties sold after 6 April 2003, you might be able to claim a capital gains tax rebate, as although the gain on such properties is subject to UK capital gains tax, it was subject to Business Asset Taper Relief, and is now subject to Entrepreneur’s Relief, both of which could reduce the tax on the gain to 10 per cent. Until 5 April 2008, gains arising on disposals of property were subject to tax at your marginal rate of income tax, so taxable at 20 per cent or 40 per cent, and from that date, are taxable at a flat rate of 18 per cent. To qualify for FHL the property has to be:
? situated in the EEA
? available for holiday letting for at least 140 days a year
? actually let for at least 70 days in a UK tax year
? let for not more than 31 days to the same occupant.
The property should be let on a commercial basis with a view to making a profit and therefore not let to close family and friends at preferential rates during the 140-day period above. If let for periods exceeding 31 days to the same occupant, these periods cannot exceed 155 days in the year, and will not count as holiday lets. There are specific rules if you have more than one property fulfilling the conditions.
You can deduct costs incurred relating ‘wholly and exclusively’ to the letting of the property, such as utility bills, cleaning, repairs, agency fees, advertising, insurance, and mortgage interest on any loan used to acquire the property (if you extend a UK mortgage over your main home, only the element related to the purchase of the French property will be permitted). In addition, for FHL only, you can claim ‘capital allowances’, instead of ‘wear and tear’, allowing you to depreciate the cost of furniture, furnishings and equipment you provide with the property such as cookers, washing machines and refrigerators, an overall more generous allowance.
If making a claim, you will probably have to prove that your property satisfies all of the relevant conditions as to the amount of time it was let for, and available for letting. Relevant documents should also be kept for at least 6 years such as a record of all the rent you receive, the dates you let the property, a record of your business expenses, sales receipts, invoices and bank statements.
Once the FHL scheme is abolished, UK owners of French holiday homes will revert to their previous UK tax liability. Those with UK property will lose these advantages, and so could end up paying thousands of pounds more to the tax man.
So if you owned or own a holiday home in France fulfilling the criteria and making a loss, you may be eligible for a tax windfall from the FHL scheme. Even if you have been making a loss you still should have been declaring the income and expenditure to HMRC. Anyone who thinks they are entitled to these temporary tax breaks should claim directly from HMRC, or speak to their accountant. When you move to France and become a French tax resident you will be liable to tax on rental income from your worldwide property according to the French tax rules.
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