• Swindon & Wiltshire Experts
• Wednesday September 18 2024
• Author Name: Michael Blaken

Life’s a beach? That’s about to change for holiday let owners – Optimum Professional Services

If you own a furnished holiday let, you might want to talk to your tax advisor – life might not be the beach it once was, says Michael Blaken of Optimum Professional Services. 

There has been an important change proposed, affecting any landlords who own properties as furnished holiday lets – the furnished holiday lettings tax regime is being abolished.

Legislation drafted by HMRC, which is due to come into effect in April 2025, applies to Income Tax and Capital Gains Tax (from April 6, 2025) and Corporation Tax (from April 1, 2025).

The changes remove tax advantages that furnished holiday let owners have over other property landlords. Originally announced by the last Government, the new Labour government plans to adopt the changes.

So, what is a furnished holiday let?

A furnished holiday let (or FHL) is a type of short-term rental property, which must be in the UK or European Economic Area, furnished, and let out to make a commercial profit.

It must be available for at least 210 days a year and actually let for at least half of that time (105 days).

Currently, and until the changes come in next April, the full amount of the owner’s finance costs – like mortgage interest – are tax deductible from their income.

Business Asset Disposal Relief (BADR) may be available when the FHL is sold, which results in a 10 per cent Capital Gains Tax rate applying.

Profits from FHLs count as relevant earnings for pension purposes, and capital allowances on items such as furniture, fixtures and fittings can be claimed against the rental income.

The Government wants to remove the FHL tax breaks to make the rules more equitable with other residential property landlords, who offer longer-term let. It believes the change will give people more opportunities to live in their local area.

Changes include:

• Income Tax: loan interest will be restricted to the basic rate for Income Tax. This means there may be more tax to pay. Also, income from the rental will no longer count as relevant earnings for pension purposes, so the amount an FHL owner can contribute to their pensions and receive tax relief on may be reduced.
• Capital allowances: rules for new expenditure will be removed and replaced with the domestic items relief available to other property businesses. This could cause an increase in the overall tax payable.
• Capital Gains Tax: reliefs based on disposing of a business asset will no longer apply to furnished holiday lets. This means the property will be taxable at the residential property rates of 18 per cent (basic rate) and 24 per cent (higher rate).

There are some specific transitional rules that will apply to these changes.

If you own properties that currently qualify for the furnished holiday tax regime, or if you are considering selling properties because losing the tax advantages may mean they are no longer the best investment for you, you should speak to your tax advisor.

Michael Blaken is accounts director at Optimum Professional Services. 

Pictured: Sandbanks in Dorset by by lbradxx from Pixabay