In light of upcoming tax reforms, many owners of furnished holiday lets (FHLs) are contemplating whether now is the right time to sell or transfer their properties to family members. Accounting firm BDO has reported that these changes, effective from April 2025, may significantly impact the financial viability of such investments.
On July 29, the government released draft legislation that aims to abolish the favourable tax regime for FHLs. Once implemented, individuals operating FHL businesses will lose several tax benefits, necessitating strategic financial planning.
Key Changes to Tax Benefits
Under the current system, interest on loans for FHL businesses can be deducted from rental income to calculate taxable profits. From April 6, 2025, this deduction will be replaced by a 20% tax credit against an individual’s tax liability. This shift will particularly affect higher-rate taxpayers, as the relief for interest will effectively decrease from 40% or 45% to 20%.
Additionally, capital gains on the disposal of FHL assets currently enjoy business asset disposal relief. Gains up to the £1 million lifetime limit are taxed at 10%. Post-April 2025, these assets will be treated as investment assets, subject to capital gains tax (CGT) rates of 18% for standard rate band profits and 24% for higher rate band profits. These rates could increase following the Autumn Budget on October 30.
Currently, gains from FHL disposals qualify for CGT rollover relief, allowing owners to defer tax by purchasing a replacement asset before April 5, 2025. After this date, the relief will only be available for investment properties in compulsory purchase cases. BDO cautions that deferred gains could be taxed at a future rate potentially higher than the current 24%.
Another change involves capital allowances. Presently, expenditures on FHL business assets qualify for capital allowances, but such relief will end in April 2025. However, existing capital allowances pools will be carried forward. BDO recommends considering capital improvements before this deadline to take advantage of the current allowances.
From April 2025, deductions will only be available for replacing domestic items. Tax relief for pension contributions, currently based on FHL profits as relevant earnings, will also be affected. BDO advises seeking professional advice for individuals relying on these profits for pension tax relief.
Evaluating Options
Ben Handley, a tax partner at BDO, suggests that affected individuals should evaluate their options and plan accordingly. “Now that the draft legislation is out, it’s prudent for owners to assess their situations and make use of the current tax reliefs,” Handley said.
For those who meet the criteria for a furnished holiday let, including letting the property for at least 105 out of 210 available days, several options are available. Handley emphasizes checking the potential tax increase and considering selling before April 2025. While business asset disposal relief and the reduced CGT rate of 24% compared to last year’s 28% are beneficial, the annual gains exemption has dropped to £3,000, warranting careful evaluation of potential tax charges.
Alternatively, transferring the property to family members might be advantageous. While gifts to relatives are treated as market value disposals, an election could allow the capital gain to be held over. However, any subsequent sale by the recipient would trigger capital gains tax at the prevailing rate. Furthermore, gifts may have inheritance tax implications if the donor continues using the property without paying rent.
For those intending to continue letting, Handley advises considering incorporating the property into a company structure. Companies benefit from a 25% tax rate on net profits and more favourable borrowing interest deductions. However, this option involves setup costs, transfer complications, and potential dual taxation on withdrawals, making thorough consideration essential.
Handley concludes by stating that owners of properties not qualifying as FHLs may not need immediate action but could benefit from selling before potential CGT rate increases. The current 24% rate may provide an opportunity to optimize financial outcomes ahead of the Autumn Budget.