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Planning for Your Furnished Holiday Lets Post-Budget

Published by Anu Bista
Published Date: April 3, 2024

In the recent Spring Budget 2024, significant changes were announced regarding the Furnished Holiday Lettings tax regime, which came as an unwelcome shock to many. The Government removed the current tax advantages for owners who let short-term furnished holiday let properties. These changes mean that short- and long-term lets will be treated the same way for tax purposes, with the special rules that provide Furnished Holiday Lettings (FHLs) tax benefits being abolished.

The abolition will take effect from April 2025. In the meantime, draft legislation will be published including an anti-forestalling rule which will apply from 6 March 2024.

Who Is Affected by These Changes?

Individuals owning FHLs will no longer benefit from the special tax regime.

Why Was the FHL Tax Regime Abolished?

FHL Tax Regime

Chancellor Jeremy Hunt claims that ending the FHL regime will help ease the housing crisis in popular destinations and support people to live in their local area.

Tax Benefits for FHLs

Currently, FHLs enjoy several tax benefits that will be discontinued from the April 2025.

Finance Costs

  • FHLs can claim all finance costs for loans used to buy furnished holiday let properties as allowable expenses for taxable profits.

Capital Gains Tax Reliefs

  • Various reliefs, such as Business Asset Disposal Relief, rollover reliefs, and gift reliefs, are available for the disposal of FHLs. These reliefs allow individuals to pay Capital Gains Tax at a lower rate of 10% or to defer the gain. These will no longer be available for individuals owning FHLs.

Capital Allowances

  • The entitlement to the capital allowances for purchasing assets such as furniture and equipment used in the FHL property significantly benefitted the FHLs. This benefit will be discontinued, increasing the tax liability of FHL business owners.

Relevant Earnings for Pension

  • Individuals could make greater tax-free contributions to the pension scheme from income generated by FHLs, which is no longer applicable after the abolishment.

What Are the Next Steps to Take?

Tax Planning Steps

FHL owners may wish to explore tax planning strategies before 5 April 2025 to leverage any existing favourable reliefs, ensuring compliance. If you own a FHL, it's wise to seek advice due to the changes in the FHL tax regime described above.

One option available to the FHL owner is to incorporate a company and transfer the FHL property to the company. Individuals can still enjoy significant benefits if the FHL is operated via a limited company compared to owning it as an individual.

Exploring the tax benefits of operating an FHL through a company versus purchasing in your personal name requires additional considerations.

Benefits of Operating FHLs Through Company Structure

Let's dive into the advantages of operating FHLs through a limited company.

Capital Allowances

A company can still claim capital allowances on fixtures, furnishings, and equipment costs in their FHL properties. This can include items such as furniture, appliances, and fittings. The ability to claim capital allowances can result in significant tax savings for the company, as these allowances can be deducted from its profits, reducing its taxable income.

The capital allowance for a FHL cannot be claimed as an individual after the abolition of the FHL special tax regime.

To learn more, explore our complete guide on Capital Allowances! 

Finance Cost Deduction

Limited companies can deduct finance costs, such as mortgage interest, from their rental income. Unlike individual landlords, who are now subject to restrictions on finance cost reliefs on FHLs, companies can deduct the total amount of their finance costs from their rental income before calculating their tax liability. This can lead to lower tax bills for companies compared to individuals.

The allowable finance cost deduction for the company is £2 million per annum.

CGT Reliefs on Disposals

CGT Reliefs on Disposals
Individuals selling their FHL properties could take advantage of the Capital Gains Tax (CGT) reliefs. Upon disposal of the FHL property, they may qualify for Business Asset Disposal Relief, lowering the CGT rate on the sale proceeds to 10%. Additional reliefs, like holdover reliefs and gift reliefs, were also available, providing owners the opportunity to defer capital gains for the future.

Individuals selling FHL properties will no longer benefit from this relief due to the abolition of the Special Tax Treatment, effective from April 2025.

In contrast, FHLs owned via a company may still qualify as a business and be eligible to claim Business Asset Disposal Relief provided that they meet certain requirements.

Tax Rates

Companies are subject to Corporation Tax on their profits, which, as of tax year 2023/24, is 19% for the companies with profits lower than £50,000 and 25% for companies with profits over £250,000. This is generally lower than individuals' income tax rates on their rental income. Higher-rate taxpayers may find that operating through a limited company results in a lower tax liability.

Dividends

Companies can distribute profits to their shareholders in the form of dividends. Dividends are taxed at different rates than other incomes, with a tax-free dividend allowance. This means that shareholders may be able to extract profits from the company more tax-efficiently than if they were receiving rental income directly.

Risk Reduction

Risk Management

Operating as a limited company reduces risks through the separation of business activities from your personal income and savings.

Tax Implications to Consider

However, it is crucial to carefully weigh the immediate tax implications before transferring the asset.

  1. 1
    Incorporation Costs
    Additional costs are associated with incorporating a company, including legal fees and administrative expenses. The costs may be slightly higher than running the business as a sole trader for additional compliance and return filing with the HMRC.
  2. 2
    Capital Gains Tax (CGT)
    The transfer of property from the individual to the company is the disposal of property for the purpose of CGT. The transfer may trigger a CGT liability based on the property's market value at the time of transfer.
    This can be a significant cost for the property owner. However, we will have to wait for the HMRC guidelines to ensure the applicable CGT rates after March 2024 for the disposal of FHL property.
  3. 3
    Stamp Duty Land Tax (SDLT)
    SDLT will be payable upon transfer of the property to the company.

For example,

Consider a scenario where a property was purchased for £300,000 in March 2017 and has appreciated to £400,000 by March 2024, resulting in an immediate chargeable gain of £100,000. Assuming a standard Capital Gains Tax (CGT) rate of 20%, the CGT payable on the date of transfer in March 2024 would amount to £20,000. The Stamp Duty Land Tax payable on the transfer would also be £19,500. The total immediate hit to your wallet would be a daunting £39.5k for CGT and SDLT combined.

Conclusion

Despite the apparent immediate financial impact, it is essential to consider the long-term benefits and overall financial implications. While CGT is ultimately payable upon the future disposal of the property, with SDLT being a one-time cost for the transfer, the investment's potential long-term returns and benefits should not be overlooked.

Need Expert Advice on Furnished Holiday Lettings?

Contact us today for efficient and hassle-free assistance.

Anu Bista
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