Coming into force after 6th April 2025, there will be changes on how Furnished Holiday Lets (FHLs) are taxed. In essence, the legislation is aimed at removing the advantages of FHLs and aligning the tax treatment to a normal Buy-to-Let business.

The benefits that FHLs currently enjoy, and that will be removed, are:

  • 10% Capital Gains Tax (CGT) rate on property sales
  • higher rate tax relief on 100% of mortgage interest costs
  • the ability to claim capital allowances on furniture fixtures and fittings.
  • using the income as ‘net relevant earnings’ towards pension contributions

What is the impact of these changes?

  • VAT

One of the issues with FHLs was that income was considered a taxable supply for many owners worried about breaching the threshold for VAT. This problem will go away with these changes.

  • Capital Gains

This will increase from 10% to 24% as result of the changes. This is because the business will no longer qualify for Business Asset Disposal Relief, which is only available to trading companies.

  • Pension Contributions

If you rely on FHL income to justify your pension contribution (because contributions are capped at either £3,600 or 100% of Net Relevant Earnings), you may need to reconsider after April 2025.

  • Mortgage Cost

Mortgage interest will no longer be 100% allowable, instead this will be aligned to the treatment of buy to let businesses. This will be an issue for higher rate taxpayers, as basic rate taxpayers still get relief at 20%.

What can be done?

There is a possible solution, which may need careful consideration, and that is to transfer these properties into a Limited Company. This would trigger a CGT liability, at 10%, but there would be stamp duty to pay.

The other option is to sell now before the CGT increases to 24%.

Conclusion

This change brings even more pressure to bear for Landlords and encourages people to sell up and get out of the market. This doesn’t seem like a business-friendly government to us but the likelihood of these changes being implemented before the election and under a Conservative government seem low. Who knows what a Labour government will implement.

Time will tell what impact this has on the FHL market. If you are thinking of getting into this market, now is the time to consider how you can use a Limited Company to mitigate the tax.