As you will have no doubt have read or seen in the media, the legislation applicable to Furnished Holiday Let properties (FHL’s) is changing with effect from the start of the 2025/26 tax year.
This presents problems and opportunities for owners depending on their own individual circumstances.
PROBLEMS
Capital Gains Tax – CGT
Some owners have been holding onto their businesses for capital growth rather than just their income earning potential.
With effect from 06.04.25 the business asset status of an FHL will cease, along with the advantageous 10% CGT rate applicable by virtue of being able to claim Business Asset Disposal Relief (BADR)
However, should an owner wish to sell they will have up to 3 tax years to do so (5 April 2028) to claim an element of BADR, but this is increasing to 14% in 25/26 tax year and then to 18% in 26/27, with future years rates being decided in later Budgets.
Mortgage Interest Relief
Another impact of the change to an FHL is that mortgage interest relief will be restricted to the basic rate of income tax (20%), which is the situation that has been in place for residential landlords since April 2020.
Owners will only be able to claim a flat 20% deduction for any interest paid.
The knock on effect is that this could lead to potentially more income tax being payable in 25/26 and/or losses being utilised much quicker from earlier tax years.
Profit Sharing
Under the legislation as it currently stands, joint owners of properties can split the profit/(loss) each year in line with their express wishes – in other words you can minimise your overall household tax burdens.
Going forward such an allocation or splitting or profits will be replaced by the traditional 50:50 split between spouses/joint owners of the property.
One of the ways that you could continue to receive a different allocation of the profits to the legal ownership is to complete a Form 17 along with a declaration of Trust before the 5 April 2025 – as this cannot be done retrospectively. Another option could be to form a trading partnership and register this with HMRC in the 25/26 tax year.
Incorporating your rental property business may be an option as well for you in order to minimise your overall household tax burdens.
OPPORTUNITIES
Multiple Properties / Losses
If you already have rental properties as well as an FHL then moving forward they will be treated the same.
Currently the rules are that any losses generated by FHL’s can only be offset against profits of that same trade.
However, from 06.04.25 any losses brought forward can then be offset against income generated by the potentially more profitable Assured Shorthold Tenanted (AST) properties.
Property Wear & Tear
Currently your FHL property must be available for at least 30 weeks (210 days) and let for 15 weeks (105 days) or more to meet the criteria for an FHL.
Going forward in 25/26 these dates will no longer be applicable so you could be able to charge more to guests in peak weeks and generate the same level of income/profit over a shorter time frame – thereby potentially reducing the amount of breakages/repair work that is needed annually.
VAT
The abolition of the FHL status for holiday cottage businesses will not change the Vat treatment for businesses which are currently registered for VAT.
The provision of holiday accommodation, whether previously qualifying as an FHL or not is still standard rated for VAT.
Mortgage Products
As the legislation is changing there may be potential for you to switch to a cheaper rate product and/or a capital repayment mortgage to counteract the loan/interest changes.
You may also be in a position to pay down some capital in order to reduce the impact of the interest changes.
Timing of Expenditure
As the tax year end approaches and the legislation changes loom, you may wish to bring forward to March 2025 (or before) expenditure on items of fixtures/fittings that are looking tired or need replaced.
As you will no longer be able to claim capital allowances on items of fixtures/fittings bought at the outset/pre trading period post 06.04.25, only being able to claim for items on a replacement basis.
These can reduce your taxable income or indeed create losses to be carried forward which you can use in 25/26.
These are just some of the issues looking forward and if you would like to discuss your own situation please do get in touch 01434 322794 or matthew@tyneredeaccountancy.com
