With impending tax reforms set to impact furnished holiday lets, Handelsbanken Wealth & Asset Management reports a significant increase in inquiries from current owners and prospective buyers. The changes, slated for April 5, 2025, will abolish the favourable tax rules currently enjoyed by Airbnb-style short-term rental properties, bringing them in line with regulations for traditional rental properties.
Under the existing system, furnished holiday lets benefit from more lenient tax treatment concerning both income and capital gains. However, the upcoming reforms, part of the UK government’s strategy to rectify housing market distortions and streamline regulations, will eliminate these advantages.
Mark Collins, Head of Tax at Handelsbanken Wealth & Asset Management, commented: “With the holiday season approaching and substantial tax changes looming, it’s no surprise that we’ve seen a spike in advice requests. Customers are considering selling their properties or suspending purchases. It’s vital for owners and potential buyers to grasp the implications of these changes.”
The new rules will revoke the full deductibility of mortgage interest and associated costs when calculating taxable rental profits. Additionally, several capital gains tax reliefs, such as business asset disposal relief, business assets rollover relief, and gifts holdover relief, will no longer apply. Furthermore, profits from holiday lets will not count as earnings for pension contributions.
Owners will also lose the ability to claim tax relief on the original cost of domestic items used in the property. For jointly owned properties, spouses or civil partners will automatically be taxed on 50% of the rental profits each, potentially pushing some into higher tax brackets.
Collins added: “While these changes are unavoidable, there are steps you can take before April next year to mitigate their impact. Professional advice is crucial to understand how the new rules will affect your situation.”
Strategies to Consider Before the Tax Changes
- Adjust Ownership Shares: Spouses or civil partners can avoid the automatic 50:50 profit split by altering the beneficial ownership of the property to unequal shares. This requires a formal application to HMRC to change the income split for tax purposes.
- Sell Before the Tax Year Ends: To take advantage of the current 10% capital gains tax rate under business asset disposal relief, consider selling the property before the new tax year. Be aware of other applicable conditions.
- Gift the Property: Transferring the property to a family member before the new tax rules take effect can allow owners to claim gifts holdover relief. However, this relief might need to be time-apportioned if the property hasn’t always qualified as a short-term holiday let. Stamp duty considerations also apply, and the recipient must pay market rent if they occupy the property to ensure the gift is effective for inheritance tax purposes.
- Maximize Pension Contributions: Owners relying on short-term holiday lets as their primary earnings should consider maximizing their pension contributions this tax year. They might be eligible for extra tax relief from the previous three years.
As the deadline approaches, seeking tailored professional advice is essential to navigate these changes effectively and minimize tax liabilities.