Holiday let owners are set to lose favourable tax reliefs from April 2025.
Individuals and businesses operating FHLs currently benefit from a handful of tax advantages that long-term letting landlords don’t, but earlier this year the Government confirmed the Furnished Holiday Letting (FHL) will be abolished meaning all income from property (FHLs and residential properties) will be treated the same.
Since the FHL changes were announced, we have had the Autumn 2024 Budget. Despite speculation that the rates of tax on the sales of residential property may increase, the top rate of Capital Gains Tax (CGT) remains unchanged at 24%.
What are the changes?
FHLs will no longer be exempt from finance cost restriction rules, meaning the tax relief available on loans taken out to purchase or refurbish a FHL property will be restricted to 20% basic rate of tax rather than a person’s marginal rate.
Income from FHLs will no longer be counted as relevant earnings for the payment of pension contributions.
Beneficial capital allowance rules for new expenditure, which reduced the taxable profits of an FHL, will be removed. As FHL income will be taxed in the same way as ordinary property letting, it will no longer be possible to claim capital allowances on plant and machinery expenditure in a dwelling house. Instead, relief on furniture and fittings purchased in the future will be restricted to ‘replacement of domestic items relief’ in line with other property businesses. Any FHL businesses with an ongoing unclaimed capital allowances pool will be able to claim writing down allowance under the new rules.
CGT reliefs on sale or gift of a property will change:
It will no longer be possible to rollover a capital gain into a holiday cottage. Gains made on a holiday cottage sold before 6 April 2025 can be rolled into other qualifying assets.
FHLs will no longer qualify for Business Asset Disposal Relief (BADR). The only exception is if the FHL trade ceases before the new measure are introduced, and the property is sold in the following three years. The rate of CGT payable on gains qualifying for BADR is set to increase following the 2024 Autumn Budget, increasing from 10% to 14% on 6 April 2025 and then to 18% on 6 April 2026.
Holdover relief on FHLs will not be possible. This gives a window of opportunity to gift a FHL property to the next generation without a CGT bill.
There will be anti-forestalling legislation to prevent the above reliefs being claimed where the transaction does not complete until after 5 April 2025.
5. Currently an FHL business that makes a loss can only carry them forward to offset against future FHL profits. Under the new legislation these losses can be offset against other property income.
The new measures for income tax and Capital Gains Tax for individuals are set to come into force on or after 6 April 2025, and from 1 April 2025 for Corporation Tax and Corporation Tax on chargeable gains.
How will this impact your business?
Holiday let owners will need to familiarise themselves with the changes to the tax treatment of FHLs. Businesses will no longer calculate profits for furnished holiday lettings separately, and for those with FHL income and other property income, reporting will be simplified.
The result of this repeal will mean FHL businesses face increased tax bills and so a review of whether a property makes commercial sense or whether it should be disposed of, should be considered.
The detail is however not as bad as feared, particularly in respect of capital allowances and losses. Those concerned about Inheritance Tax may want to gift property to the next generation before the new rules come in.
Meanwhile, the sale of a property in the next three years could still qualify for BADR if holiday letting ceases before 6 April 2025. The property could be let on a shorthold tenancy until it is sold, and still qualify for BADR.
For advice and support about the tax treatment of your holiday let(s) please get in touch. Call 0808 144 5575 or email help@armstrongwatson.co.uk.
