In the recent budget announcement of March 2024, the Chancellor delivered surprising news regarding the Furnished Holiday Let (FHL) tax regime, stirring concern among investors regarding its implications. Here, our Tax Head delves into the aftermath of these changes and offers guidance on how FHL proprietors can navigate this new landscape to safeguard their investments effectively.
What's in the budget update?
Commencing from April 2025, the government intends to discontinue the Furnished Holiday Lettings tax framework, thereby eliminating the tax advantages previously enjoyed by landlords renting out short-term furnished holiday accommodations in comparison to those leasing residential properties to long-term tenants.
How will the tax amendments impact holiday rentals in Falmouth, Cornwall?
Here's a breakdown of the five significant ways in which the FHL tax revisions will affect holiday let owners.
Alterations to mortgage interest relief
Presently, FHL proprietors are entitled to claim 100% of the mortgage interest as an expense.
Starting April 2025, holiday let owners will lose this mortgage interest tax relief, aligning with the Section 24 regulations that previously pertained exclusively to residential landlords. This change nullifies the tax advantage previously enjoyed by FHLs, who could deduct full mortgage interest from profits, thereby reducing taxable income.
This shift is especially impactful for those in higher tax brackets, augmenting their tax liabilities and emphasising the necessity for strategic tax planning. It may also prompt a restructuring of ownership arrangements, potentially leading to more FHL acquisitions through limited companies to mitigate tax implications, echoing trends observed in the buy-to-let sector.
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Modifications to profit distribution for jointly owned FHLs
April 2025 will witness the cessation of flexible profit distribution for jointly owned Furnished Holiday Lets (FHLs), bringing them in line with conventional investment properties where income allocation is strictly based on ownership shares. This adjustment eliminates the tax planning flexibility previously available to FHL owners, allowing for tailored income allocations among partners to optimise tax liabilities. Previously, this flexibility could significantly mitigate tax burdens by channeling more income towards lower-earning partners.
The revised regulations could significantly impact FHL proprietors' tax liabilities, potentially pushing some into higher tax brackets. Consequently, FHL owners face the challenge of reassessing their investment structures and profit distribution strategies to comply with these changes while striving to maintain tax efficiency.
Adjustments to pension contributions
Currently, rental income from an FHL qualifies as Net Relevant Earnings (NRE) for pension purposes, enabling proprietors to make tax-advantaged pension contributions.
However, as of April 2025, FHL income will no longer be considered as net relevant earnings for pension purposes. This alteration diminishes the scope for tax-free pension contributions, affecting holiday let owners' retirement planning strategies.
Given this development, FHL proprietors, especially those reliant on FHL income to meet pension contribution targets, must promptly reassess their financial and pension plans. This entails a thorough review of their tax circumstances and long-term objectives, evaluating the immediate impact on pension contributions and the overall viability of their FHL investments. We strongly recommend seeking guidance from both property tax advisors and pension experts.
Consult the Provestor tax team for tailored advice. Schedule your FHL tax consultation today.
Changes to relief options upon FHL sale
A pivotal modification affecting FHL proprietors planning to sell their properties is the cessation of Business Asset Disposal Relief (BADR) effective from April 2025. Currently, BADR permits a 10% capital gains tax rate on sales up to a lifetime limit of one million pounds per individual – significantly lower than the standard 20%. This relief has been a key incentive for those considering selling their FHLs.
This revision prompts many FHL owners to reconsider their exit strategies. With the expiration of this relief, owners contemplating sales in the near future may need to expedite their plans to capitalise on BADR before it lapses.
Furthermore, they will no longer be eligible for Business Asset Rollover Relief, which allows deferring capital gains tax by reinvesting in another qualifying asset. This option is particularly advantageous for holiday let owners seeking to optimise their portfolios by replacing underperforming properties with more lucrative ones, facilitating a tax-efficient transition.
Changes to capital allowances expense claims
A significant tax amendment affecting furnished holiday lets entails the elimination of capital allowances.
Under current regulations, FHLs operate under business rules, permitting them to claim capital allowances for 100% of the costs incurred on capital items such as fixtures, fittings, white goods, and integral building features, including electrical and plumbing equipment. This enables FHL owners to deduct these expenses fully from their profits in the year they're accrued, significantly reducing taxable income.
However, with the removal of this benefit scheduled for April 2025, FHL proprietors must carefully reconsider their refurbishment plans. It's imperative to assess whether current investments will remain viable in the long term, particularly for those planning to exit the FHL market.
Many may speculate whether this spells the end for FHLs. However, I remain optimistic. The demand for FHL properties persists, and the government's adjustments to the tax regime necessitate adaptation. Now more than ever, it's imperative for proprietors to devise new strategies for effectively managing their FHL investments. The impact of tax changes will vary among owners, underscoring the importance of personalised tax planning. Whether it's optimising pension contributions or addressing other tax considerations.
If you want to see how Guested can help you secure your Holiday Let in Falmouth, Cornwall, please get in touch below.