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Categories: holiday lets | tax
Time is running out for private landlords to capitalise on tax benefits that come with investing in holiday lets.
On 6th April, new legislation will come into effect that will re-categorise furnished holiday lets, affecting how these properties are taxed.
This comes as a result of a leftover plan by the Conservative government to abolish the Furnished Holiday Letting (FHL) tax regime, which the current Labour government have decided to uphold.
Changes to capital improvement rules
At the time of writing, owners of furnished holiday lets are able to take advantage of Capital Gains Tax (CGT) reliefs when selling or gifting the properties. These reliefs are possible because furnished holiday lets are currently categorised as trading businesses.
Holiday let owners are therefore able to claim CGT relief after making large-scale changes to their properties, such as putting in an extension, new kitchen or new bathroom. Due to the rules changing soon, it will no longer be possible for holiday let landlords to claim relief on these kinds of capital-raising renovations.
Smaller-scale repairs and improvements, such as replacing furniture and appliances, will still be eligible for CGT reliefs after 6th April.
No more “rollover relief”?
Currently, landlords reinvesting in holiday lets can claim “rollover relief”. This means that the CGT can be deferred across to the new holiday let property or trading business after the holiday let is sold.
In addition, landlords not currently reinvesting are eligible to qualify for business asset disposal relief before 6th April. This would allow them to pay 10% on gains up to £1m.
After this deadline, rollover relief will also no longer be possible in these circumstances.
Sean McCann, a chartered financial planner from NFU Mutual has explained:
If you are selling and buying a new furnished holiday let or other qualifying trading asset, you can roll over all or part of the gain which allows you to defer all or part of the Capital Gains Tax payable. Or if you are gifting the property, you and the person you are giving it to can claim “gift hold over relief”.
If you’re planning on ceasing your furnished holiday let business if you do so before 6th April you may be able to claim business asset disposal relief – which allows you to have £1m of gains during your lifetime taxed at 10%.
What should you do?
Mr McCann recommends that holiday let landlords looking to make large capital improvements to their properties should get these plans in order quickly, before the April deadline passes. It will be their last opportunity to save money on CGT reliefs.
If you are a holiday let landlord, make sure you are aware of all the upcoming changes by speaking to a professional tax advisor. You may need to adjust your approach.
Is a new wave of incorporation about to be triggered?
When tax changes were rolled out that did away with mortgage interest tax relief on standard buy to let property, to be replaced with a flat 20% tax credit, many landlords – especially those in the higher rate tax bracket – chose to incorporate, for the tax efficiencies this offered.
The April change may well trigger another wave of property investors to do the same.
Whilst mortgage advisors cannot tell you which route to take – this is a question for a tax specialist - the team at Commercial Trust can help you get a holiday let mortgage or short-term “AirBnB” mortgage via a limited company, so if you go down this route, get in touch.
