There were mixed views for property owners in the Spring Budget with a tax cut for those selling residential property, while those operating furnished holiday lets and property investors are facing increases in tax.
Capital Gains Tax on residential properties
The rate of Capital Gains Tax (CGT) paid on the sale of residential properties is currently 18% if the gain falls within a person’s basic rate band, and 28% if the chargeable gain is in excess of the higher rate band (currently £50,270). From 6 April 2024 the rate payable by a higher rate taxpayer will reduce to 24%, although the basic rate remains at 18%.
Furnished Holiday Lettings (FHL) tax regime
The tax advantages from letting a property as short-term holiday accommodation rather than to longer-term tenants are to be abolished from 6 April 2025. This regime has been around for many years and provided certain benefits for those offering short term holiday accommodation. These included: -
Holiday letting income being classed as earned income for the purpose of making pension contributions.
A person letting out a holiday cottage can offset the cost of loan interest incurred in purchasing or renovating the property, and get tax relief at their marginal rate of tax, which may be as high as 45%. Whereas a taxpayer renting out a property as an Assured Short Term (AST) Letting only receives a tax credit of 20% for the interest cost.
A person selling a business asset, such as a FHL can rollover the capital gain into the purchase of a holiday cottage.
A person selling a holiday cottage can currently qualify for Business Asset Disposal Relief (BADR), which results in a 10% rate of CGT. The rate of tax on residential properties is currently 18% for gains falling within a person’s basic rate band, and 28% for those taxed at the higher rate. As stated above, the higher rate will reduce to 24% before these measures are implemented.
We will need to see the detail when released, but if all of these advantages are lost and owners of holiday cottages face increased tax bills from April 2025, then a review of whether a property makes commercial sense, and whether it should be disposed of before the CGT increase should be considered.
Stamp Duty Land Tax – Multiple Dwelling Relief to be abolished
Multiple Dwellings Relief (MDR) is a claim that can be made when a person purchases a property or business consisting of more than one residential property. Examples where this could apply, are the purchase of a hospitality business including staff accommodation, and a farm with several worker’s cottages or rental properties. A MDR claim allows the SDLT on the residential dwellings to be calculated as if separate residential properties were being purchased.
MDR is to be abolished from 1 June 2024, unless contracts for the purchase had already been exchanged by midnight on 6 March 2024. This change is expected to net the exchequer an extra £1.3bn over the five-year period.
Watch our Spring Budget Analysis Webinar to hear what experts from our tax, financial services and accounting teams thought about the changes announced and how they could impact you and your business.
