Investing in furnished holiday lets (FHLs) can be a lucrative venture, but knowing how to navigate capital gains tax (CGT) is key to maximising your profits. By leveraging tax reliefs like Entrepreneurs' Relief and Rollover Relief, you can significantly reduce your CGT liability when selling your property. Understanding these tax benefits and planning effectively can turn your FHL investment into a smart financial strategy, ensuring you reap the rewards while keeping more of your hard-earned gains.
What Are Furnished Holiday Lets?
Furnished holiday lets (FHL) are properties that are furnished and let out on a short-term basis to tourists and holidaymakers. To qualify as an FHL, the property must meet specific criteria, such as being available for letting at least 210 days a year and actually let for at least 105 days.
Investing in furnished holiday lets (FHLs) offers numerous tax benefits that can significantly enhance your financial returns. FHLs are treated more favourably than other rental properties under UK tax law, allowing owners to offset expenses and claim capital allowances. This can result in substantial tax savings, reducing your overall tax burden. Additionally, FHLs qualify for certain reliefs and allowances that are not available to long-term rental properties, making them an attractive option for property investors seeking to maximise their tax efficiency. One of the most significant benefits is from the Capital Gains Taxes while selling the FHL.
To know more about FHL, please refer to our FHL article.
Capital Gains Tax (CGT) on FHLs
When you sell a furnished holiday let, you may be liable to pay capital gains tax on the profit made from the sale. However, FHLs have access to various CGT reliefs that can help reduce the CGT liability. These reliefs can reduce the tax rate on the gains from the sale, potentially saving you a considerable amount of money. Some of the major benefits are listed below:
Business Asset Disposal Relief (BADR)
As an owner of a furnished holiday let (FHL) property, you can take advantage of Business Asset Disposal Relief (BADR), which significantly reduces your capital gains tax (CGT) rate to 10% when selling your FHL. This is a substantial reduction compared to the standard CGT rates of 18% and 24% that apply to residential landlords in the basic and higher tax brackets. By claiming BADR, you can achieve significant tax savings, potentially reducing your CGT liability by up to 14% on the gains from the sale of your FHL property.
Rollover Relief
Owning an FHL property also provides the benefit of deferring Capital Gains Tax (CGT) through Rollover Relief. If you sell your FHL property and reinvest the proceeds into another property, you can defer the CGT until you sell the replacement property. This means you can delay paying any CGT at the time of the sale, providing you with more flexibility and potentially freeing up capital for further investments.
Gift Relief
If you choose to give away your FHL property or sell it for less than its market value, you might be eligible for Gift Relief, also known as Holdover Relief. This relief allows you to defer paying CGT, with the tax liability transferred to the recipient of the property. The person who receives the property will be responsible for paying CGT when they eventually sell it. Utilising Gift Relief can help you delay tax payments and possibly reduce the overall amount of tax owed.
Abolishment
However, these reliefs are only available till 5 April 2025 as the special tax regime for FHLs will be abolished from 6 April 2025. This abolishment will remove all the current tax advantages for landlords who let out short-term furnished holiday properties over those who let out residential properties to longer-term tenants.
Conclusion
Investing in furnished holiday lets (FHLs) can be a highly profitable venture, particularly when you take full advantage of the available tax reliefs to minimise capital gains tax (CGT) liabilities. By leveraging the above benefits, you can significantly reduce the tax burden when selling your property. These reliefs can transform your FHL investment into a smart financial strategy, ensuring that you keep more of your hard-earned profits.
However, it's important to note that the current tax advantages for FHLs are set to be abolished from 6 April 2025, removing many of the benefits that make these investments attractive. Therefore, understanding these tax benefits and planning your investments accordingly is essential. This way, you can maximise your returns and make informed decisions about the future of your FHL properties before the special tax regime changes.
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