Attention all overseas property holders - Government extends tax relief shocker!

A little-known and little-used relief available to individuals is the ability to set losses incurred on furnished holiday lettings against general income. This is probably because there are a great number of restrictions on the circumstances under which the loss can be used in this way. However, the good news is that one of the main restrictions has been relaxed - the bad news is that the relief will be abolished completely in less than a year!

Up until this year's Budget, the property being let had to be situated in the UK, however this has now been extended to any property situated in the European Economic Area. The reason for this sudden and generous extension is that the Government was concerned that the restriction of relief to UK situated properties contravened European Union law.

The result is that any owner of property situated in the European Economic Area can now claim for losses incurred on that property to be set against income providing they meet the following conditions:

• the property must be situated in the EEA;
• the business must be carried on commercially, and with a view to a profit;
• The property must be available for commercial letting as holiday accommodation to the public for at least 140 days during the relevant 12 month period;
• The property must be commercially let as holiday accommodation to members of the public for at least 70 days during the relevant 12 month period. A letting for a period of longer term occupation is not a letting as holiday accommodation for the purposes of the letting condition; and
• Not more than 155 days must fall during periods of longer term occupation.

A period of longer term occupation is a continuous period of more than 31 days during which the accommodation is let to the same person.

However, anybody looking to take advantage of this generous extension to the rules needs to act quickly as the Government, no doubt mindful of the potential tax cost of the new rules, intends to abolish all furnished holiday lettings relief in April 2010.

As well as claiming for the current year, property owners can also make a claim for loss relief for previous years by amending their personal tax return for earlier years providing this is completed within one year from 31 January following the date the return was submitted. In most cases therefore it will be possible to amend your return and claim losses for overseas holiday lets for 2006/2007 onwards.

In addition to being able to set losses against general income, the extension of the definition of furnished holiday letting also provides for generous capital gains tax reliefs which could also prove extremely valuable.

Therefore, if you do have an overseas property which meets the criteria set out above, don't look this unexpected gift horse in the mouth and act now to take advantage of this generous new relief before it is taken away again!

Fancy doing a 'David Cameron'?

As the papers revealed yesterday, and at the tender age of 43, the Tory leader has indeed paid off his mortgage. For many people, the idea of owning their home outright is one of the most appealing of all financial possibilities. Supposing for a moment that a windfall did come your way, which was just sufficient to prize the deeds from the clutches of building society. Would you or should you do that? On the surface at least, it should be a straightforward decision. But regrettably, it isn't. Because it all depends on your age, your financial circumstances and that other minor matter - what you and your spouse want out of life. Here are a few scenarios that help illustrate the point, assuming in each case that there's a lump sum of £150,000 available.

1. Couple A are in their early 50's, owe £120,000 on their mortgage, £10,000 on credit cards and have a pension pot and investments worth £150,000. Answer? Don't blow the cash on fast cars, holidays and racehorses - do the right thing and deal with the credit card debt first, then the mortgage. And then (perhaps) buy that new car.

2. Couple B are also in their 50's, have a £100,000 mortgage, owe £10,000 on credit cards and have no pension or investments. In the absence of a pension, one of the key considerations here is what they do with the money they save by being rid of the mortgage? If they don't like the idea of investing it in stocks and shares, preferring instead to leave their windfall on deposit, then the most their capital could earn would be around 3% gross a year. There is the risk that their money will devalue if inflation takes off but if the mortgage is cleared they could consider redirecting the monthly savings from the mortgage into a pension contribution for the future spreading the risk. On the other hand, investing their £100,000 could produce a return for them that's higher than the rate of interest they pay on their mortgage. So in theory at least they'd do better investing their windfall and continuing with their mortgage.

3. Couple C are in their early 30's owe £150,000 on their mortgage, have no other borrowings, savings of £7,000 and because of Mr C's redundancy, have decided that they need to start their own business. Perhaps the answer here is to do a bit of both: pay say £75,000 off the mortgage and use the rest to provide working capital for the business and some income for the couple until the enterprise is up and running. Alternatively, they may wish to look at an offset mortgage which would give the best of both worlds. Your capital sits in a deposit account for your use earning no interest but the amount in this account is balanced off against what you owe meaning no mortgage interest either.

If this is you beware of the new pension legislation being put in place from July as it may be absolutely imperative that you make a pension contribution with some of the money.

Certainty is a difficult thing to come by in this world but it is an undisputable fact that by reducing your mortgage you have that certainty. It is vital however that you do not miss an opportunity unique to your situation and it is key to have cash available somewhere.

Just how desperate are you to get out of the clutches of the building society? And do you think that paying off a mortgage is a smart move financially - no matter what your circumstances it may be? Just remember mortgage borrowings on your primary residence are likely to be the cheapest long term borrowings you ever have!!