Ed FossEast Anglia's �5.4bn a year tourism industry faced a massive blow last night - in the small print of Alistair Darling's Budget.Tax breaks and concessions introduced 25 years ago to encourage investment in self catering holiday cottages and boost the tourism industry are to be scrapped in a shock government move.Ed Foss

East Anglia's �5.4bn a year tourism industry faced a massive blow last night - in the small print of Alistair Darling's Budget.

Tax breaks and concessions introduced 25 years ago to encourage investment in self catering holiday cottages and boost the tourism industry are to be scrapped in a shock government move.

A tax expert predicted a 'significant impact' on the holiday letting business in the region, which could force owners of houses let out to holidaymakers to sell up and invest their cash elsewhere.

The changes may however be welcomed by those who feel the large number of holiday lets in the county fuel a shortage of permanent housing, forcing many people, especially the younger generation, to live in urban areas instead of their home villages.

The special tax privileges will be scrapped in two years time, but the impact could be felt before that as owners rearrange their finances by selling up, according to Clare Goodswen, director of personal tax and private client services at chartered accountants M+A Partners.

Mrs Goodswen said the timing was particularly bad because the domestic holiday market was hoping for a healthy mid-term future despite the wider economic downturn.

'This is the last thing holiday cottage owners need, given that they are hopeful of a few good seasons where UK holiday makers are deciding to stay at home rather than travel abroad.

'I certainly suspect that as a result, owners will take steps to sell properties sooner rather than later.

'This is very concerning news for this area, given the exposure to the tourist industry in Norfolk and Suffolk. None of the professional commentators expected this to happen in advance of the Budget.'

The Country Land and Business Association's chief tax adviser Adrian Baird said the changes were found buried deep in the detail of the Budget and represented a 'bombshell'.

He added: 'This destroys a political consensus that has existed since 1983 that it was right to encourage self-contained property to be provided to UK holiday-makers.

'You would have expected such a major tax change to have deserved an explanation in Mr Darling's Budget speech.'

The proposed changes could cost the tourism industry millions of pounds, added Mr Baird.

Chris Scargill, partner and tourism specialist at the Holt office of Larking Gowen, said he was particularly concerned about people who had been planning to enter the market or expand their letting portfolios.

'It could reduce the amount of money invested in the market and devalue the long term stock of such properties,' said Mr Scargill.

'Money could end up elsewhere and not in tourism.'

Michael Timewell, chairman of Norfolk Tourism, where the industry generates �2.4bn a year, said: 'Tourism is big for Norfolk, but particularly so at the moment in the wider economy.

'Anything that may harm or prejudice investment in tourism is of great concern and obviously depressing.'

The HMRC has explained that the changes are being made to bring the rules into line with those governing furnished holiday accommodation across Europe.

t More details about the rule changes can be found at www.hmrc.gov.uk/budget2009.

Favourable tax rules currently apply to furnished holiday accommodation, which is the letting of lodgings in the UK for short periods. To qualify for this treatment, the property must meet a number of conditions, including being let for 10 weeks of the year and being available for letting for 20 weeks of the year.

The beneficial tax treatment for property let as holiday accommodation will no longer be available from April 6, 2011. Rental profits from holiday lets are treated as business profits rather than as investment income.

This type of letting is also popular because it allows the owners to enjoy some private use of the property without disqualifying the property from the beneficial tax treatment.

Income tax benefits are considerable. All the set up costs of equipping the cottage are fully deductible against income, so meaning full tax relief is received immediately.

The early years of letting often produce a taxable loss, for which immediate tax relief is given.

This means that if the owner has other income chargeable to tax and they let a holiday cottage, any loss arising will generate am immediate tax credit.

This results in an immediate cash flow advantage for those clients.

Currently there are also significant benefits in relation to capital gains tax and inheritance tax.