The tax reliefs enjoyed by landlords running Furnished Holiday Lets (FHL) were cut by the Chancellor this month. Some say the market will collapse. I don’t agree, but I do think landlords need to adapt short and long-term tax plans if they want to remain successful and protect their pensions.
The finer details of exactly which tax advantages will be removed from holiday lets is yet to be confirmed. However, the government stated that draft legislation will be forthcoming, so, as ever, it’s prudent to get ahead and work out your game plan.
Here are the top five FHL tax advantages landlords should be prepared to make adjustments for, and the plans they should make to manage the change, if they come into law:
- Loss of mortgage interest tax relief: This shift would eliminate the tax advantage FHLs enjoy, allowing them to deduct full mortgage interest from profits, reducing taxable income.
The change would particularly affect those in higher tax brackets, by increasing their tax liabilities. This makes strategic tax planning even more important.
What should investors do? Review ownership structures and consider a move to a limited company to mitigate the tax impact.
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- Splitting profits for jointly owned lets: This change could remove the tax planning advantage FHL owners currently have, which allows for optimised tax liabilities through adjusted income allocations between owners. Currently, this flexibility can significantly reduce tax burdens by distributing more income to lower-earning partners.
If the new rules become law, it could have significant tax implications for FHL owners, potentially pushing some into higher tax brackets and increasing their tax liabilities.
What should investors do? FHL owners should re-evaluate investment structures and profit allocations, so they manage tax efficiencies but also meet compliance expectations.
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- Changes to pension contributions: From April 2025, FHL income may no longer qualify as net relevant earnings for pension purposes. This decreases the capacity for tax-free pension contributions, impacting holiday let owners’ retirement planning.
What should investors do? FHL owners, especially those relying on FHL income to meet pension contribution levels, must now urgently reconsider their financial and pension strategies to ensure they can still achieve their goals if the change goes through.
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- Changes to reliefs when selling FHLs: The Business Asset Disposal Relief (BADR) currently allows a 10% capital gains tax rate on sales up to a lifetime limit of one million pounds per person.
However, the Spring Budget included an ‘anti-forestalling’ rule preventing the use of unconditional contracts to obtain capital gains tax relief under the current FHL rules.
This rule applies from 6 March 2024, and the same will likely apply to Business Asset Rollover Relief, used to defer capital gains tax.
What should investors do? FHL owners may need to reconsider their exit strategies if they are planning to sell from April 2025. They may need to exit sooner. It’s important to get good advice to manage this change because of the implications for capital gains tax.
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- Changes to claiming capital allowances expenses: Currently, FHLs operate under business rules, allowing them to claim capital allowances for 100% of the costs on capital items such as fixtures, fittings, white goods, and integral features of the building, including electrical and plumbing equipment.
These costs can be deducted, in full, from their profits in the year they’re incurred, significantly reducing taxable income. But from 2025, it is likely this advantage will no longer be allowed.
What should investors do? FHL owners need to consider their refurbishment plans and whether the current investments will remain beneficial in the long term, particularly for those planning to sell a property or exit the FHL market.
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* Nadeem Raziq is head of tax at Provestor *
