07/04/2024

Tax

Furnished Holiday Letting
Budget Implications

 

What was 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 6th March 2024 and 5th April 2025  to ‘dispose’ of the FHL to benefit from a favourable capital gains tax rate of 10% on any ‘gain’ made.
  • The full draft legislation relating to FHL has yet to be published so this update could be subject to change.

 Furnished holiday lettings and capital gains tax

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%.
  • Capital allowances can be claimed on furniture, furnishings, fixtures, and fittings including items used for the business outside the FHL (e.g., van and tools).
  • Where the property is jointly owned by a married couple or civil partnership they can decide how the taxable profit is split.
  • A taxpayer can make pension contributions based upon the level of their FHL profits, thereby enhancing their pension pot.
  • Subject to how the FHL was set up, it was possible, on a subsequent disposal of the property to pay capital gains tax at 10%.
  • A FHL could be gifted to say a family member without triggering off a dry capital gains tax charge. This could also have a knock-on benefit to inheritance tax planning.
  • Subject to certain conditions being met, it was possible to rollover gain from the sale of another business asset into the purchase of 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 upon which part of the UK the property is situated in.

 Furnished holiday lettings and tax benefits

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, 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. 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.

Loan interest tax treatment and furnished holiday lettings

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.
  • An inability to roll over the gain into an FHL or on a disposal of an FHL, potentially results in a cashflow disadvantage by bringing the capital gains tax into charge early.

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 6th March 2024 and made a taxable gain of £120,000.
  • Putting the capital gains tax (CGT) annual exemption to one side and assuming Asif’s FHL portfolio had been structured correctly, his CGT liability would be £12,000.
  • If Asif sold the same property in 2024/25 his CGT liability would be £28,800.

What should a FHL owner consider doing?

  • Undertake a property impact review in order to compare the present state of play with that coming in from April 2025.
  • Is it worthwhile switching from a short-term let to a long-term let? Will the gross rental income rise or fall as a result of doing so? 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? Is there any planning which can be done pre-sale to mitigate the tax liability, such as putting it into joint with a spouse or civil partner?
  • From the sale, is it worth reinvesting the proceeds into say a commercial let? Any loan interest would attract tax relief at your marginal rate of tax.
  • Can you raise the rent which would increase the tax liability but also improve the net rent in your pocket?
  • Can you afford to pay down the debt? Again that would increase the overall tax liability but the net rent would also go up, plus the capital payment would come back into your pocket upon a subsequent sale.
  • If you are married or in a civil partnership, if you have not already done so, is it worth restructuring the ownership in order to mitigate the overall tax liability? 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 you are one of them, is it worth retaining the rent at least at its present rate, and bank the VAT savings for yourself?

VAT savings and furnished holiday lettings

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.