The changes to furnished holiday lettings (FHLs) announced in the Spring Budget last month are significant and could have a considerable impact.
FHLs enjoy a number of enhanced tax relief rules, but these will be abolished from April 6, 2025. This means that profits from FHLs will be taxed similarly to any other rental property, potentially resulting in higher tax liabilities for FHL owners.
Here’s a breakdown of the current tax reliefs and how they may be impacted:
- Business Asset Disposal Relief reduces the rate of capital gains tax (CGT) to 10% for disposal of qualifying FHL properties. After the changes it is likely the standard residential property rates of 18% and 24% will apply. These changes might necessitate a reassessment of CGT planning strategies.
- Other CGT Reliefs such as business asset rollover, gift holdover and incorporation relief may no longer be available for FHLs after the changes take effect.
- Mortgage interest relief is currently received as a full deduction from rental profits. Instead only basic rate tax relief will be available, as for other rental properties.
- Capital Allowances will no longer be available for furniture, fixtures and fittings in FHL properties. It is likely that tax relief will only be available when assets are replaced, in line with longer term lettings; which may affect cash flow.
- Pension Implications: Profits from FHL businesses are currently treated as relevant earnings for pension contribution purposes. This is likely to stop which may prompt a review of your retirement provisions.
While the abolition of the favourable FHL treatment won’t happen until 6 April 2025, the government are intending to introduce measures from Budget Day (6 March 2024) to prevent tax planning arrangements that artificially accelerate the disposal date of an FHL.
Given these impending changes, FHL owners should assess their current tax positions, financial strategies, and potential implications on their overall business operations. So, do give the CKLG team a call on 01223 810100 and we can provide advice to help you navigate these changes.