Have you recently considered the potential impact of new tax changes on your holiday lettings? Understanding the upcoming furnished holiday lettings tax changes can help you make informed decisions and possibly save a significant amount of money. If you own a furnished holiday let (FHL), it’s crucial to be aware of the changes that were announced in the Spring 2024 Budget and set to take effect from April 2025. This article will provide you with a comprehensive overview of these changes and discuss how they may affect you.
Introduction to Tax Changes for Holiday Lettings
Having a holiday home can be both a fruitful investment and a delightful retreat. With recent updates in the tax regulations surrounding furnished holiday lettings, it’s important to evaluate how these changes might impact your property’s financial outlook. The new rules could significantly alter the tax advantages previously enjoyed by FHL owners. The Spring 2024 Budget introduced critical amendments that were further detailed in the draft legislation released on 29 July 2024.
Overview of the Spring 2024 Budget furnished holiday lettings tax changes
The new legislation has delineated a set of important alterations, including the abolition of the beneficial tax treatment for Furnished Holiday Lets from 6 April 2025 for income tax and capital gains tax (1 April 2025 for corporation tax). The Budget also proposed a reduction in the top capital gains tax (CGT) rate on the sale of residential property from 28% to 24%.
Key Dates to Keep in Mind
- 6 April 2025: Abolition of beneficial tax treatment for FHLs for income tax and capital gains tax.
- 1 April 2025: Abolition of beneficial tax treatment for FHLs for corporation tax.
- 5 April 2025: Deadline for making decisions regarding the transitional relief and anti-avoidance provisions.
Detailed Changes to Furnished Holiday Let Taxation
Understanding the specific furnished holiday lettings tax changes and their impacts is crucial for making informed decisions. Here, we breakdown the major tax changes related to FHLs:
Mortgage Interest
Currently, mortgage interest on FHLs is treated as a deduction from rental income for income tax purposes. However, from April 2025, relief will instead be given as a 20% tax credit.
- Current Relief: Deduction from rental income.
- New Relief (April 2025 onward): 20% tax credit.
Capital Gains Tax (CGT) on FHLs
The CGT regime will undergo significant changes. Currently, gains from the disposal of FHLs may qualify for Business Asset Disposal Relief (BADR), where the first £1 million of lifetime gains are taxed at 10%. From April 2025, these benefits will no longer apply.
- Current CGT Rate: Business Asset Disposal Relief (BADR) – Gains taxed at 10% for the first £1 million.
- New CGT Rate (April 2025 onward): Normal residential property CGT rate of 24%.
Allowable Expenses for FHLs
Another key change relates to allowable expenses for FHL businesses. While they are currently eligible for capital allowances, from April 2025, you will only be able to claim a deduction for the cost of replacing domestic items against your rents.
- Current Allowance: Eligible for capital allowances.
- New Allowance (April 2025 onward): Only deductions for replacing domestic items against rents.
Pension Contributions
From April 2025, the profits from FHLs will no longer be treated as relevant earnings for purposes of obtaining tax relief on pension contributions.
- Current Treatment: FHL profits treated as relevant earnings.
- New Treatment (April 2025 onward): FHL profits not treated as relevant earnings.
Losses
Carry-forward losses from FHLs will be able to be offset against future profits of the property rental business generally rather than just profits from the former FHL property.
- Current Treatment: Offset against profits from the same FHL property.
- New Treatment (April 2025 onward): Offset against future profits of the property rental business generally.
Corporation Tax
For corporation tax, income and expenses need to be apportioned on a time basis, subject to a just and reasonable override. The substantial shareholdings exemption (SSE) for subsidiaries is also blocked for disposals from 1 April 2025.
- Current Treatment: Income and expenses apportioned without restriction.
- New Treatment (April 2025 onward): Income and expenses must be apportioned on a time basis.
Anti-Forestalling Provisions
Anti-forestalling measures have been introduced. These include restrictions where there’s an exchange of contracts on a disposal from 6 March 2024 that completes after 5 April 2025 for businesses and 1 April 2025 for companies.
- Effective from: 6 March 2024.
- Completion by: 5 April 2025 for individuals, 1 April 2025 for companies.
Options for Furnished Holiday Let Owners
If you own an FHL, these significant changes may urge you to take strategic decisions before April 2025. Here are your primary options:
Option 1: Sell the Property
Selling the property is one way to respond to these furnished holiday lettings tax changes. Even though the new CGT rate from April 2025 is reduced to 24%, it’s essential to seek advice on your likely tax charge before finalizing any transaction. Also, ensure you report capital gains on the property and pay the associated taxes within 60 days of completion.
| Key Considerations When Selling | Current Scenario | After April 2025 |
|---|---|---|
| Capital Gains Tax Rate | 10% with BADR | 24% |
| Tax Payment Deadline | Within 60 Days | Within 60 Days |
Option 2: Transfer the Property to Family
Another option might be transferring the property to a connected relative. If the property is a business asset, you can elect to ‘holdover’ any capital gain on disposal to relatives. Be mindful of inheritance tax implications, especially if you continue using the property without paying rent.
| Key Considerations When Transferring Property | Current Scenario | After April 2025 |
|---|---|---|
| Holdover Relief | Available | Varies with conditions |
| Inheritance Tax | Potentially applicable | Highly likely |
Action checklist for furnished holiday let owners
Here’s a quick action checklist to prepare for the furnished holiday lettings tax changes coming in April 2025:
- Evaluate Current Use: Determine if your property currently qualifies as an FHL.
- Understand Financial Impact: Assess how the new tax rules will affect your financial situation.
- Consider Selling: If selling before April 2025, ensure you understand the CGT implications.
- Family Transfers: Consider transferring the property to a relative, keeping inheritance tax in mind.
- Review Mortgage Interest: Plan for the switch from a deduction to a 20% tax credit.
- Recalculate Allowances: Adjust for changes from capital allowances to deduction for domestic items.
- Adjust Pension Contributions: Re-evaluate pension contributions in light of the new rules.
- Plan for Losses: Note the new treatment of carry-forward losses.
Conclusion
The impending tax changes for furnished holiday lettings present an urgent call for action. Whether it’s through selling your property, transferring it to a family member, or reconsidering other financial options, being proactive will ensure you’re well-prepared for April 2025. Take time to thoroughly understand how these alterations will impact your holiday home investment and make the necessary adjustments to optimize your tax benefits.
By staying informed and prepared, you can navigate these changes with confidence, ensuring that your holiday lettings remain a rewarding venture.