Furnished Holiday lets and the upcoming changes
On 29 July, the new government confirmed their intention to scrap tax reliefs associated with Furnished Holiday Lets (FHLs) with effect from 6 April 2025. If you own an FHL, it is crucial you review your plans and ensure you understand what this change means for you.
Your property may qualify as an FHL if it meets the following criteria:
- Your property is available to let to the public for 210 days, and is actually let for 105 days or more each tax year
- Your property is typically let out for short-term lets under 31 days.
What are the changes?
If you own an FHL, the following changes will apply from 6 April 2025:
- Mortgage interest will no longer be deductible in full from your rental profits. Instead, tax relief on mortgage interest will be capped at the 20% basic rate. Generally, owners that only pay tax at the basic rate, won’t see any change to their tax liabilities. If you are already a higher rate taxpayer from other income sources and you make a profit on an FHL you will pay more tax.
- Relief for capital expenses will only be provided for the replacement of existing domestic items. You will no longer be able to claim capital allowances on new purchases.
- You will no longer be able to claim capital gains tax (CGT) reliefs such as business asset disposal relief (BADR), rollover relief or gift relief on transactions involving your FHL.
- The income generated from your FHLs will no longer count as relevant income to determine your maximum amount of pension contributions eligible for tax relief.
For companies who hold FHLs, these changes will apply from 1 April 2025.
VAT
It is worth noting that the VAT rules are not changing and VAT will still be applicable to properties let on a short-terms basis, when the total turnover of the business exceeds £90,000 in any 12-month period.
Transitional measures
The policy paper released by HMRC outlines a number of measures to support the transition to the new rules:
- If you have claimed capital allowances on assets prior to the legislation coming into force, you can continue claiming writing down allowances on these assets.
- Any losses generated from FHL businesses will be available to offset against either UK or foreign property income, as appropriate.
- The changes will not affect the validity of claims for CGT relief that depend on your property having been an FHL in the past.
Claiming your capital allowances
The current tax year (ending 5 April 2025) will be your last chance to claim capital allowances.
Many FHL owners are unaware that there is an extra level of capital allowances that can be claimed on the ‘fixtures’ within the fabric of the building. These are often referred to as ‘embedded fixtures’.
If you are considering substantial purchases that currently qualify for capital allowances, it may be sensible to bring those purchases forward into the current year.
Thinking of selling or giving away the property?
You may consider selling your properties or perhaps now is the time to gift it to the next generation to reduce your exposure to inheritance tax. Making a sale or gift now, before the changes take effect could mean that you are eligible for the following reliefs:
- BADR: a lower CGT rate of 10% as opposed to either 18/24% rate for residential property.
- Gift relief: for CGT purposes, gifted properties are treated as having been sold at their market value, meaning they could give rise to a capital gain on which CGT is due, despite not receiving any cash for the transaction. Gift relief enables you to holdover this gain to the recipient of a gift who will then be taxed on the gain only once they dispose of the asset, this means there is no need to pay upfront CGT on the gift.
- Rollover relief: if you are planning to sell your FHL property to invest in a different trade such as a hotel or a bed and breakfast, rollover relief enables you to defer paying the CGT you would have paid on your property until you have sold the new trading asset you have invested in.
These CGT reliefs will be withdrawn under the new legislation from 6 April 2025.
If you currently own an FHL and would like to make sure you are prepared for the upcoming changes in the legislation, please get in touch with LHP.
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