The UK government’s planned abolishment of the tax benefits for furnished holiday lets (FHLs), set for April next year, is prompting landlords to reconsider their investment strategies. This change, detailed in the government’s recent draft legislation, marks a significant shift in how FHLs will be treated financially, with several key tax advantages set to disappear from April 2025.
Ben Handley, a tax partner at BDO, underscores the urgency of the situation: “With the abolition of the FHL tax regime confirmed, those affected should weigh their options promptly. Whether maintaining current operations, selling assets, or transitioning property to family members, each route requires careful consideration of the impending tax implications.”
The end of an era for holiday let investors
The forthcoming changes, detailed in recent draft legislation, will dramatically alter the financial landscape for FHL owners. Among the most significant changes is the replacement of interest deductibility with a 20% tax credit, a move that will particularly impact higher-rate taxpayers by flattening their relief rate.
Capital Gains Tax (CGT) treatment will also undergo a major overhaul. Properties will no longer qualify for the favourable 10% rate under business asset disposal relief, instead facing CGT rates of 18% or 24%, depending on the landlord’s tax band.
Navigating the new tax terrain
As the April 2025 deadline looms, landlords are grappling with a range of strategic options. Some may choose to continue their current lettings, provided their properties meet the strict criteria. Others are contemplating selling before the deadline to capitalise on existing CGT reliefs, although the recent reductions in CGT exemption limits necessitate careful tax planning.
Family succession planning has emerged as another potential route, with some landlords considering transferring properties to family members. This approach could allow for CGT deferral through holdover relief, but it’s not without its complexities, particularly regarding inheritance tax implications.
The incorporation conundrum
For some landlords, incorporating their lettings into a company structure presents an appealing option. This strategy could potentially benefit from corporate tax rates and different financing conditions. However, as Handley cautions, “Incorporation comes with its own set of challenges and double taxation on drawn profits.”
As the holiday let sector braces for this transformative shift, landlords across the UK are being urged to act swiftly and strategically. The decisions made in the coming months could have far-reaching implications for their investments and the broader landscape of the UK’s holiday rental market.
