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Over recent years, the market for furnished holiday let (FHL) properties has increased dramatically. As travel restrictions were imposed during the COVID pandemic and nervousness remained regarding overseas travel following the lifting of restrictions, the UK prospered in a ‘staycation’ boom. We evidenced a number of landlords convert their long term let properties into holiday lets as demand outweighed supply and weekly rental rates jumped upwards.
However, this has led to issues in the wider housing market. With interest rates increasing and a lack of properties being either sold or available to let, there was a slowdown in house sales and an increase in rental rates, pricing some out of the market all together.
To help combat this, the Chancellor announced in the March Budget that the tax advantages currently offered to owners of FHLs were to be scrapped from 6 April 2025. This is likely to have significant impact on those individuals and businesses currently operating FHL properties.
Chris George, Tax Advisory Partner shares his insight on what tax advantages are being removed:
Mortgage Interest Deductions
Currently, mortgage interest on a qualifying FHL property can benefit from a full deduction against income, resulting in an Income Tax saving of up to 45%. However, from 6 April 2025, the mortgage interest rules will follow those of other property lettings whereby only a maximum of 20% tax relief is available.
For FHL owners with significant borrowings or those with multiple properties this could have a substantial impact on tax liabilities.
Capital Allowances
Another major advantage of FHL properties is the availability of capital allowances. These allowances provide tax relief (in most cases at 100% in the year of acquisition) on various parts of the property as well as fixtures and fittings. This can include everything from a new bathroom to plates, sofas and beds.
From April 2025, these allowances will not be available on future purchases of these types of assets. In addition, there may be a clawback of allowances previously claimed on FHL properties. While there is still some uncertainty about how any clawback would work, it could be that FHL owners have a tax charge equivalent to the current market value of any assets that have previously had allowances claimed and are still owned in April 2025. This could result in a significant tax charge in the tax year of change.
Pension Planning
Another benefit of FHL properties is that their profits were classed as trading income for pension purposes. This means that they count toward net relevant earnings which determine the level of pension contributions which can benefit from tax relief.
Moving forward, FHL profits will be treated as investment income like all other rental property profits and as such will not count as net relevant earnings for pension purposes.
In some cases, this will drastically reduce the amount of pension contributions that some landlords can make.
Capital Gains Tax Reliefs
One of the other key tax advantages is the availability of Capital Gains Tax (CGT) reliefs on FHL properties.
Currently, FHL properties benefit from CGT Holdover Relief meaning that they can be gifted to a family member without incurring any liability to CGT. This is attractive on those properties who are debt-free as it also can be passed down without an SDLT liability as well. From 6 April 2025 Holdover Relief will not be available on the gift of the property to individuals.
In some cases, the disposal of an FHL can benefit from CGT relief known as Business Asset Disposal Relief (BADR). Utilising this relief means that the CGT rate on the disposal of the property falls to 10%. Other conditions also have to be met and BADR is not available on all FHL disposals, but from 6 April 2025, BADR relief will not be available on any disposals of FHL properties.
The time to Act is NOW
Unusually with tax changes, advanced warning has been given on the changes coming into force. This gives those affected the chance to plan for the changes in order to minimise their impact.
For some, these changes will be the catalyst for reviewing their ownership of the FHL properties. Of course, the property could be changed to a long term let and the potential to have longer term tenants with more income security, however the tax treatment is now aligned with previous FHLs. Alternatively, property owners may look to sell up. With the reduction in the top rate of CGT applicable to property to 24% it is more attractive to sell especially for those who would not have qualified for the 10% BADR rate. Another option is to make use of the CGT Holdover relief while it is still available and pass the property onto children without incurring any CGT liability.
As with all tax planning, there is no ‘one size fits all’ approach. Any FHL owners should seek professional tax advice to discuss the options available and weigh up the options before making any decisions. To get in touch with Chris George or another member of our Tax Advisory team, please call 0330 058 6559 or email hello@scruttonbland.co.uk
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