If you own a furnished holiday let, changes that were announced in the Spring budget by the previous government and recently confirmed by Rachel Reeves mean you may want to take some action before 5 April 2025.
It has been confirmed that the beneficial tax treatment for Furnished Holiday Lettings will be abolished from the 6 April 2025 for income tax and capital gains tax (1 April 2025 for corporation tax). Draft legislation was published in July that provides some information and clarity on the changes in the reliefs that will come into force.
A furnished holiday let is a property that must be available for short-term letting to the public for 210 days and actually let for 105 days or more and is treated as a trade for certain tax purposes.
Once the regime has been abolished taxpayers will lose the following tax benefits:
Mortgage interest
Mortgage interest currently is treated as a deduction from rental income. From April 2025, relief will instead be restricted to a 20% tax reducer. However, companies will continue to benefit from relief in full.
Capital allowances
Qualifying expenditure in furnished holiday lettings are currently eligible for capital allowances, but from April 2025 you will only be able to claim a deduction for the expenditure on replacing domestic items. Any existing capital allowances pools will be carried forward and you will continue to claim writing down allowances.
Capital gains tax
Capital gains tax charged on disposals of furnished holiday lets may currently qualify for Business Asset Disposal Relief where the first £1m of lifetime gains are taxed as 10%; or the gain can be ‘rolled over’ on the purchases of certain new qualifying business assets. From April 2025 the normal residential property capital gains tax rate, currently up to 24%, will apply, and the ‘rollover’ of gains will not be possible.
Additionally, if a Furnished Holiday Let is gifted to, say, a family member, it is currently possible to holdover (defer) the capital gain. However, that will no longer be possible after 5 April 2025.
Anti-forestalling provisions mean that if there is an exchange of contracts on a disposal from 6 March 2024 but completion is after 5 April 2025 (1 April for companies) claims to rollover relief and holdover relief will be denied where the transfers are between connected parties which implies there will be an exemption for third party transfer undertaken for wholly commercial reasons.
Pension Contributions
Furnished holiday lettings profits will no longer be treated as relevant earnings, which will affect tax relief for personal pension contributions which is limited to the higher of £3,600 or 100% of “relevant net earnings”.
Losses
Carried forward losses from furnished holiday lettings will be available to offset against future profits of the property rental business rather than just the profits of the former furnished holiday let property.
Corporation tax
Income and expenses for corporation tax will need to be apportioned on a time basis.
The substantial shareholdings exemption (SSE) for subsidiaries is blocked for disposals from 1 April 2025 which means that disposals of corporate vehicles that would have qualified if made in the previous two years need to happen before this date or SSE will be denied. Anti-forestalling provisions will apply where a contract for disposal is exchanged from 6 March 2024 but which completes on or after 1 April 2025.
How Ormerod Rutter can help:
The expert team here at Ormerod Rutter are able to talk you through what these changes might mean for your furnished holiday let. If you would like to discuss how the above changes may affect you, or what action you could take before the new rules come into effect, please contact Andrew Russell on 01905 777600.
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