If you own a Furnished Holiday Let (FHL), recent tax changes may significantly impact your investment. The abolition of the FHL tax regime from April 2025 will remove many tax benefits, making it essential to review your options. Whether you plan to continue letting, improve your property, or sell, understanding Capital Gains Tax (CGT) rules and exemptions is crucial.
Do You Qualify as an FHL?
To qualify as an FHL under current rules, your property must:
- Be available for letting to the public for at least 210 days per year.
- Be actually let for at least 105 days per year.
- Not be let on long-term rentals exceeding 31 days per tenant for more than 155 days.
Since FHL is treated as a trade business If you meet these criteria, currently for the tax year 2024/25 you can benefit from tax advantages, including Business Asset Disposal Relief (BADR), capital allowances, and full mortgage interest relief. However, these advantages will end after April 2025.
Explore the latest updates on FHL rules in our comprehensive article, "Autumn Budget 2024: A Complete Guide".
What Actions Should You Consider?
Continue Letting and Assess Future Tax Impact
If your current arrangements work well, you may not need to take immediate action. However, it is wise to assess how much additional tax you may owe after April 2025 due to the loss of FHL tax benefits.
Additionally, if you plan to improve the property to increase rental income, consider making capital investments before April 2025. This will allow you to continue claiming capital allowances on qualifying expenditures in the tax year 2024/25, provided they meet the criteria before the rules change.
Example
Caren rents out her holiday home for 120 days per year. She plans to spend £50,000 on renovations.
If renovated before April 2025
Assume capital allowances let her deduct 30% of the £50,000 renovation cost from her taxable rental income.
Taxable income before renovation deduction: £30,000
Less capital allowance deduction: £15,000
New taxable income: £15,000 (or a loss to carry forward)
Tax saved (if taxed at 40%): £6,000 (40% of £15,000)
If renovated after April 2025
In the same scenario, capital allowances no longer apply, she cannot deduct the 30% of £50,000 renovation cost. Caren has to pay tax on full £30,000 rental income.
Selling the Property Before April 2025
If you are unsure about keeping your FHL, you should analyse the financial impact of tax changes and consider selling before the new rules take effect.
Benefit from Business Asset Disposal Relief (BADR)
If your FHL qualifies, selling before 6 April 2025 could allow you to pay a reduced 10% CGT rate on capital gains up to £1 million rather than the standard 18% or 24% rates.
Additionally, if your FHL ceased operations before the tax year 2024/25 and you're unsure whether to sell now or later, keep in mind that you can claim BADR relief within three years of the cease of the trade. This means the 10% CGT rate on gains up to £1 million will apply until 5 April 2025, after this the new rules for FHL applies and the standard rates of 18% and 24% will take effect from the tax year 2025/26.
Lower CGT Rate
Even if you don’t qualify for BADR, the CGT rate on residential properties for higher-rate taxpayers has now reduced from 28% to 24%, making it a more favourable time to sell.
Annual Exemption
For the 2023/24 tax year, the annual capital gains exemption WAS £6,000 per individual, reducing to £3,000 from 6 April 2024. This means only gains above this threshold are subject to Capital Gains Tax (CGT).
60-Day CGT Reporting Rule
If you sell the property, you must report any capital gains and pay the CGT within 60 days of completion.
This will also be reflected in your Self-Assessment tax return of your relevant tax year it belongs under the relevant tax category.
Example
David purchased an FHL in 2015 for £200,000. He plans to sell in early 2025 for £300,000. Under BADR, his CGT liability would be 10% on the £100,000 gain (£10,000 tax bill). However, if he sells after April 2025, BADR no longer applies, and CGT could be charged at 18% or 24% based on which his/her tax status and potentially increasing his tax bill.
Selling the Property Before April 2025
If you plan to pass on the property to your family, the new rules may influence your decision.
- Transferring the property to a connected relative is treated as a disposal at market value for CGT purposes.
- However, as an FHL is a business asset, you may be able to ‘hold over’ the capital gain, deferring tax until the recipient sells the property.
- The recipient will then face an 18%/24% CGT rate on historic gains when they sell.
- Consider potential Inheritance Tax (IHT) implications, especially if you continue to use the property without paying rent.
Example
Emma wants to transfer her holiday cottage to her son, James. If she transfers before April 2025, she can elect to hold over the gain, meaning no immediate CGT liability. However, when James sells in the future, he will owe CGT at 24% on any historic gains. Emma must also consider IHT implications if she continues using the property without paying rent.
What If Your Property Doesn’t Qualify as an FHL?
If your holiday home does not meet FHL criteria, there is no immediate need to act. However, given the 4% CGT reduction for the higher rate taxpayer, this may be a favourable time to sell if you were already considering it.
Example
Tom (a higher rate taxpayer) owns a holiday home that does not qualify as an FHL. Since the CGT rate has dropped from 28% to 24%, he decides to sell in 2024 rather than wait, ensuring he benefits from the reduced rate.
Conclusion
The abolition of the FHL tax regime from April 2025 presents challenges for property owners. Reviewing your financial position, assessing tax liabilities, and considering strategic actions—such as selling or transferring the property—can help mitigate potential tax burdens. Seeking professional tax advice will ensure you make the most informed decision for your situation.
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