Hero background
Business Tax, Personal tax

Get ready for tax changes on furnished holiday lets

RJP LLP By RJP LLP
Get ready for tax changes on furnished holiday lets

If you own a holiday home and rent it out as a furnished holiday let (FHL), some changes announced in the 2024 Spring Budget could mean you will be paying more tax in the future. These changes come into effect in the 2025-26 tax year.

The former government had already planned to abolish beneficial tax treatment for FHLs and this policy was adopted by Labour. It will bring to an end any tax advantages for income and capital gains tax from 6 April 2025 and from 1 April 2025 for corporation tax purposes.

How is the taxation of holiday lets changing?

Once the FHL regime has been abolished the following changes will apply:

Reduced tax relief on mortgage interest

FHLs have been treated as trading businesses and so any mortgage interest was fully tax deductible. From April 2025, these properties will be treated like other rentals and relief will be given as a 20% tax credit for all taxpayers. This represents a reduction in tax relief available for individuals from 40% and 45%.

No more capital gains tax relief on disposals

As a trading business, some FHLs could qualify for business asset disposal relief (BADR) and benefit from the 10% capital gains tax rate on the first £1m of lifetime gains.

From April 2025, the normal residential property CGT tax rate – currently 24% – will apply, and there will be no transitional period.

Note that HMRC has also brought in anti-forestalling provisions to ensure that property owners cannot orchestrate a disposal to circumvent these new rules. This means that in cases where contracts on a disposal are exchanged after 6 March 2024, but completion is delayed beyond 5 April 2025, (the deadline date and end of the tax year) any claims to secure tax relief will be denied if the transaction involves connected persons.

No flexibility over rental profit sharing

The current ability for spouses and co-owners to elect how to divide the rental profits derived from a FHL according to their other income will be ending from 5 April 2025. This will have implications for higher and additional rate taxpayers.

Restrictions to allowable expenses

FHL businesses are currently eligible for capital allowances because they are considered a trading business. This will change from April 2025 and just as with other rentals, it will only be possible to claim for replacement costs.

Restrictions to rental income for pension contributions

From April 2025, profits from a FHL property will not be accepted as earnings for claiming tax relief on pension contributions or for Class 2 and voluntary Class 3 NIC purposes.

What this means

If you own a property which meets the current rules to qualify as a FHL, you will have qualified for some significant tax advantages. Now these will no longer be available, it’s important to consider what, if any action you should be taking.

Firstly, speak with us to understand how your tax liabilities could be changing in the future. If the costs are not viable, you may want to sell the property and act sooner rather than later, especially if you could be entitled to BADR.

One of the surprises in the 2024 Autumn Budget was that capital gains tax did not increase as sharply as some had expected. In addition, the reduction in the rate of CGT to 24% for higher rate taxpayers in relation to property disposals, introduced by the Conservatives, was not withdrawn by Labour.

Bear in mind that capital gains on residential property disposals must be reported to HMRC online and the tax paid within 60 days of completion.

If you have been considering making property improvements to improve the rental returns, it might be worth making any capital investments before 6 April 2025. This will enable you to continue claiming writing-down capital allowances in future tax years, provided the works undertaken qualify for capital allowances.

Given how significant these tax changes are, it’s crucial for FHL owners to act promptly and seek professional advice to be able to make informed choices about their future tax liabilities.

partners@rjp.co.uk

How to get onboard with RJP
1
Talk to us
Have an initial discussion with a member of the RJP team to identify ways we can enhance your business's growth with our comprehensive support and strategic advice.
2
Hassle-free migration
Choose RJP and we'll smoothly manage all transitions, handling paperwork, coordinating with your current accountant, and ensuring no deadlines are missed for a worry-free experience.
3
A pathway to growth
Finally, we will send you the required documents to sign and return, leaving you to continue leading your business, backed by our abundant, responsive advice and support.
cta background
Get the latest tax tips to your inbox every month


    faq background
    FAQs
    What services can RJP offer to help me understand how my business is truly performing?
    At RJP, we understand that keeping a finger on the pulse of your business's health is crucial. That's why we offer management reporting services—think of them as a regular health check for your company. These insights show you the real-time performance of your business, helping you make informed decisions to nurture and grow your enterprise.
    I'm keen to expand my business. How can RJP help me with that?
    We love seeing your business flourish! Growth and improvement are at the heart of our practical advice. From the ins and outs of everyday operations to big-picture strategic moves, we're here to offer clear, actionable steps that can propel your business forward.
    Audits and compliance can be a headache. How does RJP ease this process for business owners?
    We know dealing with the issue of compliance and auditing can be less than thrilling. That's exactly why we're here—to handle the complex stuff so you don't have to. We offer comprehensive compliance services, ensuring everything is up-to-date without you having to wade through a sea of regulations.
    I've heard about tax relief schemes but don’t know where to start - can RJP guide me?
    Absolutely! There's a world of opportunity out there to support your business financially, and we're well-equipped to be your guide. We can help you understand and access HMRC’s tax relief schemes that are relevant to you and your business, making sure you're not missing out on any potential benefits.
    If I have a question or need support, how responsive is RJP to my needs?
    When you need us, we're just a call or an email away—no question is too small or too large. We're known for our quick responses and our fixed fees mean you can reach out without worrying about unexpected costs. Plus, we always keep things simple and straight to the point. We're not just your accountants; we're part of your team, ready to support both your business and personal needs.