How do the changes to furnished holiday lettings affect property owners?
The changes to the tax treatment of furnished holiday lettings will significantly impact property owners. With the abolishment of the beneficial tax regime, owners will face higher tax liabilities as their properties will be taxed like other residential property businesses.
This shift eliminates the advantages previously enjoyed, such as the reduced capital gains tax rate under Business Asset Disposal Relief and the ability to claim 100% annual investment allowance on qualifying expenditures.
Key considerations for property owners
Property owners will need to re-evaluate their investment strategies, potentially facing increased costs and reduced profitability. Strategic planning and timely actions, such as making necessary investments and considering the sale of properties before the new rules take effect, will be crucial to mitigate the impact of these changes.
Maximising Annual Investment Allowance (AIA)
Until 6th April 2025, owners of properties that qualify as Furnished Holiday Lets might want to consider increasing their expenditure on equipment such as furniture and televisions. This is because the 100% Annual Investment Allowance (AIA) remains available until this date. Investing in these items now can help maximise tax efficiency under the current rules.
Ensure you claim Capital Gains Tax (CGT) reliefs
Under the current rules, FHLs benefit from several tax advantages. To qualify, properties must be available for letting for at least 210 days per year and let commercially for at least 105 days. These rules allow for capital gains tax reliefs, full interest cost allowances, and eligibility for plant and machinery capital allowances.
The current capital gains tax reliefs, particularly Business Asset Disposal Relief (BADR), are set to cease from 6th April 2025. Under BADR, qualifying gains are taxed at a reduced rate of 10%. Property owners considering selling their FHL properties before this deadline could benefit from the 10% CGT rate - the anti-forestalling measures mentioned in the Spring Budget have not been legislated as yet and there is no clarity as to whether they will still be implemented, and if so, if they will apply retrospectively to Spring Budget Day 2024. Therefore, please ensure you speak to us for advice on a case-by-case basis before taking any action.
Understanding the impact on diversified businesses
The new tax regime will also affect diversified businesses that incorporate FHLs into their operations. The complexity of disentangling business elements for tax purposes will increase, requiring careful planning to maintain a viable commercial structure. The shift might push some property owners towards selling their FHLs or converting them to long-term rentals.
LWA can help you prepare for the changes
Given the upcoming changes, our expert team with vast experience in supporting residential and commercial property owners and landlords, can help you prepare for the changes by:
- Reviewing your current FHL property portfolio and assess the potential impact of the new tax rules.
- Advising on the timing of any planned sales of your FHL properties to take advantage of the current CGT reliefs before they are abolished.
- Evaluating the benefits of making significant capital investments in your properties before the Annual Investment Allowance changes.
For bespoke advice, please contact a member of our friendly and knowledgeable Corporate and Personal Tax team by emailing our Tax Manager, Nickie Antley-Slater via mail@lwaltd.com (including ‘FHL tax changes’ in the subject field), or call us on 0161 905 1801 in Manchester or 01925 830 830 in Warrington. In the meantime, take a look at our property case study on our website here.