Furnished Holiday Letting Budget Implications

 Furnished Holiday Letting
Budget Implications

Is it announced in the Budget regarding furnished holiday lets (FHL)?

• In the Spring 2024 Budget, the Chancellor stated that the beneficial FHL tax regime will be abolished primarily from April 2025.
• However, the government will introduce legislation to prevent owners from entering into an unconditional contract between 6^th March 2024 and 5^th April 2025  to ‘dispose’ of the FHL to benefit from a favourable capital gains tax rate of 10% on any ‘gain’ made.
• The government has yet to publish the full draft legislation relating to FHL, so this update could be subject to change.

What tax breaks have FHL owners enjoyed?

• Tax relief on loan interest is at the taxpayer’s marginal rate. A potential tax saving of up to 60%.
• You can claim capital allowances on furniture, furnishings, fixtures, and fittings, including items used for business outside the FHL, such as vans and tools.
• When a married couple or civil partnership jointly owns a property, they can decide how to split the taxable profit.
• A taxpayer can make pension contributions based upon the level of their FHL profits, hence enhancing their pension pot.
• Subject to the FHL’s setup, paying capital gains tax at 10% on a subsequent property disposal was possible.
• You could gift a FHL to a family member without triggering a dry capital gains tax charge. This could also have a knock-on benefit to inheritance tax planning.
• Subject to meeting certain conditions, you could rollover gain from selling another business asset into buying an FHL, thereby avoiding an immediate tax charge.
• Subject to certain conditions being met, it was possible to rollover gain from the sale of an FHL into the purchase of either another FHL or another business asset thereby avoiding an immediate tax charge.
• As a footnote – it is possible that a FHL can pay business rates as opposed to council tax. and even claim small business rates relief. The conditions vary depending on the part of the UK where the property is situated.

What is the likely impact of removing the FHL tax benefits from April 2025?

• From April 2025 onwards, the FHL owner is likely to find that the net rent in their pocket will fall and the tax liability will rise.
• Depending upon FHL owner’s own particular circumstances, it could heighten the risk of being affected by the high-income child benefit charge, a reduction in the personal allowances, and being caught by the pension tax charge.
• If the FHL owner relies on using the FHL profit to be able to make pension contributions, hence there will be a reduction in that person’s pension provision.

An example regarding the change in the loan interest tax treatment

• Mary has earned an income of £95,000 and an FHL income of £25,000. She has suffered loan interest of £10,000.
• In the 2024/25 tax year, her tax bill, relating solely to the FHL, would be £8,000. Hence, the net rent in her pocket would be £17,000.
• Assuming tax rates stay the same in 2025/26, her tax bill would rise to £12,000 with a net rent of £13,000.
• Extrapolate that over a 10-year period, assuming everything stays the same, the aggregate drop in net rent would be £40,000.

What is the likely impact of removing the FHL capital gains tax treatment?

• An increase in the capital gains tax liability on a subsequent disposal of the FHL.
• A ‘dry’ tax charge when gifting a property away would need to be notified to HMRC within 60 days from the date of the gift and the tax paid within the same time frame. Missing out on an inheritance tax planning opportunity.
• Not rolling over FHL gains or disposing of an FHL may trigger early capital gains tax, causing cashflow issues.

An example regarding the disposal of an FHL pre and post-6th March 2024.

• Asif is a higher-rate taxpayer. He sold his FHL property before 6^th March 2024 and made a taxable gain of £120,000.
• Ignoring CGT exemption, proper structuring means Asif’s FHL portfolio incurs a £12,000 CGT liability.
• If Asif sold the same property in 2024/25 his CGT liability would be £28,800.

What should a FHL owner consider doing?

• Conduct a property impact review to compare the current state with April 2025 changes.
• Is switching from short-term to long-term let worthwhile? Will gross rental income rise or fall? Will there be a saving on costs such as advertising and cleaning?
• Is now the time to sell up? If so what would be the taxable gain? Can pre-sale planning, like joint ownership with a spouse, mitigate tax liability?
• Is reinvesting sale proceeds in commercial let worth it? Loan interest could attract tax relief at your marginal rate.
• Can you raise the rent which would increase the tax liability but also improve the net rent in your pocket?
• Paying down debt increases tax liability but raises net rent and returns capital upon sale.
• Reduce this Sentence length less than 20 words but keep meaning same. If not held 50:50 submit form 17 within 60 days of the change post-April 2025.
• Is it feasible and worthwhile to incorporate your FHL portfolio? Loan interest will attract tax relief at the appropriate corporate tax rate (ranging from 19% to 25%). There are a lot of other tax and non-tax considerations to take into account when looking at this option.
• At present, some FHL owners may have to be VAT registered if their taxable turnover, either solely from their property portfolio or in aggregate with that from another trade, exceeds the VAT registration threshold (£85,000 in 2023/24 and £90,000 in 2024/25). If so, is it worth keeping rent stable and banking the VAT savings?

If you wish to discuss the Furnished Holiday Letting Budget Implications or other issues please do contact us.

Check out our article about ‘5 signs of a pro vs a burden accountant’

Read more about Furnished Holiday Lettings (FHL) in the Spring 2024 Budget here

Discover more on the Government website.