A welcome break for owners of holiday cottages

If you let out a holiday cottage or flat in a way which complies with the "holiday letting rules," then it is possible to deduct expenses, including mortgage interest, in a way that allows you to reduce the tax you pay on your main occupation.

Normally, if you rent out a property then expenses can only be offset against the income you earn from rents. However, if you buy a holiday home, which you plan to operate as a business offering tourist accommodation, then the rules are more generous. Provided you rent the cottage out for at least 70 days, and the property is available for rent for 140 days, then you can roll up all expenses together, including mortgage interest.

This total is then offset against rental income. But if the expenses are so big that it results in a loss then this loss can be offset against your other earned income, such as your salary for your main occupation. This can have the effect of introducing a tax subsidy to your borrowing and other expenses.

These special rules were originally introduced to encourage would-be holiday home owners to invest in quality property and upgrade what had become a dilapidated tourist accommodation stock.

However, this relief is not available on holiday retreats outside the UK, so HM Revenue & Customs became concerned that the holiday letting rules were in breach of EU regulations outlawing such discrimination.

The Government had therefore announced that these rules would be scrapped, and those running holiday cottages would be treated in the same way as all other landlords.

However, last week, the change was abandoned in the rush to dissolve Westminster, and not everyone is convinced it will be revived under a new Government.

Valerie Smart, head of tax at PricewaterhouseCoopers, Edinburgh, said: "This threatened to have a big impact on those running holiday cottages particularly in the north of Scotland, although it would also have affected landlords in cities like Edinburgh which cater for the seasonal tourist trade.

"So there is a part of me which wonders whether the dissolution of Parliament was an excuse to quietly drop the change, which I think would have hit farmers who rely on an income from farm cottages particularly hard."

It is possible that a counter argument could be constructed, pointing to the different length of the holiday letting season in the UK, compared with Spain or Greece, which could allow the holiday letting rules to continue.

Smart adds: "They could lengthen the amount of time the cottage was required to be let, which would allow UK properties to be treated differently and not be in breach of EU rules."

To qualify for holiday letting reliefs the business must be run on a commercial basis, with a realistic prospect of turning a loss into a profit within a "reasonable period," often taken to be about five years.