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.