The recent announcement in the 2024 Spring Budget regarding the abolition of furnished holiday let (FHL) status from April 2025 has left many property owners with important decisions to make. What does this mean for those who currently hold FHL status, and should they keep or sell their properties? Let’s delve into these questions to provide clarity in uncertain times.
What does this mean?
Businesses qualifying as an FHL have long enjoyed various tax breaks that set them apart from other types of lettings. These perks include:
- full deduction of finance costs,
- capital allowances on items such as furniture, fixtures and fittings,
- profits are classified as relevant earnings for pension contribution purposes,
- strategic profit allocation to co-owners,
- access to Capital Gains Tax reliefs on disposal, including:
- business asset disposal relief (BADR) – a 10% tax rate on the first £1 million of capital gains.
- gift holdover and rollover relief – no tax to pay on transfers to connected parties including family members, trusts and limited companies.
- business asset roll-over relief – no tax to pay where an FHL is sold and the proceeds are reinvested in other qualifying assets.
We are still waiting for the government to publish draft legislation, but expect that from April 2025, these benefits will disappear for FHL businesses.
Keep or Sell?
For those considering whether to keep their FHL business, a key change is the restriction of relief for financing costs.
Finance costs include mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans.
Landlords with residential lets that do not meet the FHL criteria, only receive tax relief at the basic rate. In contrast, landlords of FHL properties are able to deduct the full amount.
For illustration, a higher rate taxpayer with £50k of finance costs would pay a further c£10k p.a. in income tax when the changes come into effect.
Finance cost restrictions only apply to individual landlords. Operating a rental business through a limited company would allow finance costs to be fully deductible against rental income and lower Corporation Tax rates of tax to be accessed.
If you are intending to keep your FHL business, you could consider operating as a limited company. Transferring the property to a company before 6 April 2025, may provide access to CGT reliefs (subject to draft legislation).
For those contemplating a sale, the window of opportunity is closing fast. With just under 12 months remaining before the changes take effect, you must carefully weigh your options to ensure you maximise the benefits of Capital Gains Tax relief. Although the government’s stance on this matter is pending, securing entitlement to BADR before terminating business activity is crucial. Once the trigger of business termination occurs, properties can be sold within three years and qualify as disposals. Given this uncertainty, our recommendation at this moment in time is to terminate business activity within the 2024-2025 tax year.
In summary, the impending abolition of FHL status marks a significant shift in the tax landscape for property owners. While the full implications of these changes remain uncertain pending government clarification, proactive decision-making is imperative to safeguard financial interests. Whether you decide to keep or sell, there are actions that you will need to complete to ensure your business or sale of your property/properties is a success. As the situation evolves, staying up to date will be essential in making well-informed choices for the future of your property investments.