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Category: holiday lets
Holiday let landlords were told that their tax position would change, come April 2025, in the Spring Budget this year. However, with a general election coming up and a possible new government, there are unanswered questions on the details.
Landlords of furnished holiday lets (FHL) have automatically been treated as businesses, from the perspective of tax. However, amongst the forty policy decisions made, number 16 was to abolish the “preferential” tax regime.
What led to the change?
The chancellor, Jeremy Hunt, said the FHL tax regime was:
creating a distortion meaning that not enough properties are available for long-term rental by local people
And that this was the reason he was abolishing it, adding that it would:
make the tax system work better for local communities
So, in essence, he believes this will help local people in high tourism areas, for example Cornwall and Devon, by making the tax position of running a holiday let property no more beneficial than a long term buy to let.
The hope being, one assumes, that landlords who currently run FHLs may revert to long term lets, to increase the rental stock specifically in high tourism areas – or at that more landlords will not move into the holiday let sector.
Given holiday let properties are allowed to be used by the owner for a proportion of the year, it could also be a tactic to take the shine off buying second homes with this in mind.
What has been confirmed regarding the change?
The sticking point around this subject is that, with the government in recess and the potential for a new team to take the helm on July 4th, FHL landlords are unclear on where they stand and as such cannot plan for potential changes.
The record of the change is given in the policy paper “Spring Budget 2024 — Overview of tax legislation and rates (OOTLAR)”, where it is stated that:
As announced at Spring Budget 2024, the government will abolish the Furnished Holiday Lettings tax regime, eliminating the tax advantage for landlords who let out short-term furnished holiday properties over those who let out residential properties to longer-term tenants. This will take effect from April 2025.
Draft legislation will be published in due course and include an anti-forestalling rule. This will prevent the obtaining of a tax advantage through the use of unconditional contracts to obtain capital gains relief under the current FHL rules. This rule will apply from 6 March 2024.
But this is the extent of the detail available.
What could the removal of the FHL tax regime mean?
If implemented in full, which is inferred in the OOTLAR policy paper, FHL landlords will no longer be eligible for Capital Gains Tax relief on the disposal of holiday let properties.
At present Business Asset Disposal Relief would typically apply and so the first one million pounds of lifetime gains are taxed at a flat 10%. Or, the gain can be rolled over when buying a new business asset (which can mean a range of things besides property, such as machinery, computers, stock, materials or intellectual property).
In future, this rules will no longer be in place and a Capital Gains Tax rate of 24% will stand in its place.
Tax relief on the cost of interest on holiday let mortgages will also change. Where currently mortgage interest costs are deducted from FHL rental income for tax purposes, this will not happen come April 2025.
This change is similar to the 2017 – 2021 changes in tax law, where tax relief on mortgage interest was phased out, to be replaced with a flat 20% tax credit. The same thing will come into effect for FHL landlords.
Will the change have its desired impact?
Back in 2017, or even prior to that in 2015 when the news of tax changes to long term buy to let’s was announced, proactive landlords began to prepare.
Tax advice became central to future investment strategies, and many landlords – especially higher rate tax payers – incorporated their portfolios, or made future purchase through a limited company structure so as to retain tax relief advantages.
As such, it begs the question whether this move will actually help local communities at all. It also does not directly impact the cost of property, which can be too high to be in any way affordable for prospective first time buyers.
What do FHL landlords need?
With the change coming in under a Conservative government, if the party secures a win on July 4th then it has to be expected it will proceed.
Many landlords see Labour as unsupportive to their position, so if they were to win at the general election, it feels unlikely there would be any reversal in the plans for FHLs.
As such, as an FHL landlord it makes sense to start planning how to adjust. Tax advice will be critical to making the right choice financially. Setting up a limited company to run FHL properties through will mean selling those properties to the company, which may be subject to stamp duty.
Whilst nothing is certain in this life but death and taxes, the latter is a fiercely complicated subject and has significant implications, so the cost of professional tax advice should be worth its weight in gold.
