Proposal to abolish Furnished Holiday Lettings (FHL) Tax Status: Key changes for property owners

In the Spring Budget 2024, the UK Chancellor announced the abolition of the furnished holiday lettings (FHL) tax regime from April 2025. This change aims to address the housing shortage by redirecting properties from the short-term holiday market to long-term rentals. Here's an overview of what this means for property owners.

Current vs. Proposed Tax Positions:

Capital Gains Tax (CGT) Reliefs: Currently, FHL properties qualify for Business Asset Disposal Relief, which reduces the capital gains tax rate to 10%. Under the proposed changes, capital gains on the sale of FHL properties will be taxed at the standard rates of 18% or 28%, depending on the owner's income.

Oban Holiday Lets (OHL) comment - The CGT rate is only relevant at the property's point of disposal (sale), so hopefully, it is many years away if you are achieving good returns and are happy with our management service.

Capital Allowances: 

Owners can currently claim capital allowances on the cost of furniture, fixtures, and equipment used in the property. Under the new regime, this benefit will be removed, meaning no capital allowances will be available. It will be replaced by the less generous replacement of domestic items relief.

OHL comment - It would be advisable to make any capital expenditures within this tax year to ensure a 100% write-off. Domestic item relief means capital expenditures will only be tax deductible on replacement, not when originally purchased, and will be limited to the cost of the original item.

Income Treatment: 

Income from FHLs is currently treated as earnings for pension contributions, allowing owners to benefit from tax relief on these contributions. This treatment will be abolished, and income from FHLs will no longer be considered earnings for pension contributions.

OHL comment - Even if you have no other “relevant” earnings for pension contributions, everyone is entitled to contribute £2800 pa and receive a 20% basic rate tax uplift for the government.

Mortgage Interest Relief: 

Property owners can currently deduct mortgage interest from their rental income before calculating their tax liability. From April 2025, mortgage interest relief will be restricted to the basic rate of income tax (20%).

OHL comment - If you are a basic rate taxpayer, then this has no impact; if you are a higher rate taxpayer, you will effectively lose half of your mortgage interest cost from being tax deductible.  So on a £100k mortgage at 5% interest it would cost you £100k x 5% x 50% (impact) x 40% (tax rate) = £1000pa

VAT Treatment:

FHLs are currently treated as businesses for VAT purposes, allowing property owners to register for VAT if their turnover exceeds the threshold (£90,000 as of 2024) and reclaim VAT on expenses. Under the new regime, properties may no longer qualify as businesses, potentially resulting in the loss of VAT reclaim.

OHL comment - For owners under the VAT limit, this has no impact. For owners looking to build a property portfolio that would take them over the VAT limit, the potential for FHL to be VAT-exempt is positive, albeit the government has not clarified this area as yet.

Limited Company:

There will be no changes to the tax treatment for limited companies. Profits will continue to be subject to Corporation Tax at 19% (25% for profits over £250,000). Full mortgage interest can still be deducted as a business expense, and gains will be subject to Corporation Tax rather than personal CGT rates. Employer pension contributions will remain deductible business expenses. Limited companies may find it easier to maintain VAT registration and reclaim VAT on expenses if they continue to operate other business activities.

OHL comment - For owners looking to purchase future properties, a Limited company structure is likely the correct decision given the various tax advantages. However, transferring current properties from personal ownership to a Limited company will trigger capital gain tax and stamp duty (including the second home penalty), and a detailed calculation is required before any decision is made.

Consultation Process:

The new Labour government has launched a consultation process to gather feedback from stakeholders, including property owners, industry associations, and local communities. This consultation aims to ensure that the transition is managed effectively and mitigate any potential negative impacts. The process will involve public forums and workshops to engage with property owners and other stakeholders, online surveys to collect broader feedback, and policy reviews to incorporate the feedback into the final policy framework.

Conclusion:

The abolition of the FHL tax status, changes to mortgage interest relief, and potential VAT implications mark significant shifts for property owners. As the April 2025 deadline approaches, owners must stay informed and take proactive steps to navigate these changes. By understanding the implications and participating in the consultation process, property owners can make informed decisions about the future of their investments.

Property owners should contact their tax advisors for further information and tailored advice.