The planned abolition of favourable tax treatment for furnished holiday lets (FHL) from April next year is prompting many owners to consider whether now may be the right time to sell or pass on their property to family members, according to accounting giant BDO.
On 29 July the government published the draft legislation to abolish the Furnished Holiday Letting (FHL) tax regime.
Once enacted, this will mean that from 6 April 2025, individuals operating FHL businesses will lose a number of key tax benefits.
Currently, interest incurred on loans for the purpose of a furnished holiday letting business are treated as a deduction from rental income in calculating taxable profits of the business. From 6 April 2025, interest for businesses operated by individuals will cease to be an allowable deduction and relief will instead be given as a 20% tax credit from the individual’s tax liability. For 40% and 45% rate taxpayers, this will mean a reduction in tax relief for interest to the 20% rate.
As trading assets, capital gains on the disposal of furnished holiday letting assets by individuals currently may qualify for business asset disposal relief: where they qualify, gains up to the lifetime limit of £1m would be taxed at a rate of 10%. As investment assets, from 6 April 2025 such gains will be subject to the CGT tax rate of 18% for profits within the standard rate band or 24% for profits within the higher rate band under current rates. If there is a change to the CGT rate announced in the Autumn Budget (30 October) then these rates may increase.
Gains on the disposal of a furnished holiday let currently qualify for CGT rollover relief. This means that if a FHL is sold before 5 April 2025 and a replacement qualifying asset is purchased, a claim can be made to deduct the capital gain from the tax base cost of the new asset, thereby deferring the tax point of the gain. From 6 April 2025, the relief is only available for investment properties in cases of compulsory purchase.
However, BDO warns that, where any gain is deferred, it will be liable to tax at the rate prevailing at the future date it comes into charge, which could be higher than the current 24% rate.
Expenditure on qualifying assets for a furnished holiday letting business are currently eligible for capital allowances. As a letting of residential investment property, such relief will be withdrawn from 6 April 2025, although it has been confirmed in the draft legislation published that any existing capital allowances pool will be carried forward.
BDO advises that where you have a FHL property and were contemplating making capital improvements, you may wish to consider doing so before 5 April 2025, so that capital allowances can be claimed on the expense.
For expenditure incurred from 6 April 2025, only a deduction from profits for the cost of replacing domestic items will be available.
Tax relief for pension contributions by individuals is currently limited to contributions of the higher of £3,600 or 100% of net relevant earnings. Currently, profits from furnished holiday lettings are treated as relevant earnings. BDO advises that from 6 April 2025, therefore, those individuals who rely on profits of a furnished holiday lettings business to support obtaining tax relief for their pension contributions may need to seek appropriate advice.
Time to consider options
Commenting on the changes, Ben Handley, tax partner at BDO said: “Now that draft legislation has been published confirming the abolition of the furnished holiday letting regime, it would be sensible for anyone affected to consider their options now, plan ahead and make use of the tax reliefs currently available.
“If you usually let out your holiday home sufficiently for it to qualify as a furnished holiday let – so 105 days out of 210 days available for letting – then there are choices to be made. If the current arrangements suit you, there may be no need to change but it is sensible to check how much extra tax you will pay.
“Another option is to sell the property before 5 April 2025. Although the sale may qualify for business asset disposal relief and even though the headline rate of tax is also now reduced to 24% compared to 28% in the prior tax year, the annual gains exemption has also reduced to £3,000, so it would be sensible to seek advice on your likely tax charge before you complete the transaction. Remember that capital gains on property need to be reported and the tax paid within 60 days of completion.”
Handley adds: “Alternatively, it might be the right time to pass on the property to your family. Giving an asset to a ‘connected relative’ is treated as a disposal at market value. However, as a furnished holiday let property is a business asset, it may be possible to elect to ‘holdover’ any capital gain on disposal to relatives.
“Of course, if they subsequently sold it, capital gains tax would be payable on any historic gains at the prevailing rate at that time, which could be higher than the 24% rate currently. In addition, the gift may have inheritance tax implications, particularly if you continue to use the property without paying rent, so consider your options carefully.
“If you want to carry on letting the property, it is also worth investigating whether incorporating it into a company structure would be beneficial. While companies pay only 25% on net profits and deductions for interest on borrowings can be more cost-effective, there can be costs on setting the company up and transferring in the property and issues with lenders. Equally, if you want to withdraw profits there will effectively be two sets of taxes to pay (personal and corporate) – so incorporating a letting business needs very careful thought.
Handley concludes: “Of course, if your holiday home does not qualify as a furnished holiday let, there is no pressing need to act but, if you were considering it anyway, the current 24% capital gains tax rate – which could go up at the Autumn Budget – may mean it is a good time to sell.”
