Furnished Holiday Lets -

A guide to navigating the new landscape

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Effective April 2025, important tax reforms will significantly alter the financial landscape for Furnished Holiday Let (FHL) owners in the UK. As the government streamlines tax benefits, aligning FHL taxation with standard residential property regulations, property owners must prepare for these changes to effectively manage their financial planning and obligations.

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Revised Administrative Procedures

From April 2025, income and gains from FHLs will no longer be processed independently. Instead, they will be integrated into the broader property business framework, whether UK-based or overseas. While this integration simplifies the administrative process, it may increase overall tax liabilities, thereby requiring careful financial strategising.

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Adjustments to Finance Costs

Previously, FHL owners enjoyed full mortgage interest relief. With the new regulations, the relief will be capped at 20%, mirroring the conditions set for other residential landlords. This shift is particularly impactful for those in higher tax brackets. It is advisable to reassess your mortgage arrangements and consider potential refinancing options to mitigate any adverse effects.

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Changes in Capital Allowances

The current system allows FHL owners to claim capital allowances on new furniture and equipment. Post-April 2025, this will be restricted to replacements of domestic items, although existing capital allowance pools can still claim writing-down allowances. Owners should contemplate completing any planned upgrades before the changes are implemented to maximise current benefits.

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Revised Capital Gains Tax (CGT)

Presently, FHLs benefit from reliefs such as Business Asset Disposal Relief. The forthcoming changes will eliminate these reliefs for properties sold after the deadline, subjecting gains to higher residential property rates, potentially up to 24%. Selling before April 2025 could be advantageous to leverage existing reliefs, though one must be aware of anti-forestalling rules.

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Pension Contributions Adjustments

Currently, FHL income qualifies as relevant earnings, facilitating higher pension contributions with tax relief. However, post-2025, this income will no longer meet the criteria for relevant earnings for pension purposes. It is essential to reassess your pension strategy and explore alternative income sources for contributions.

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Loss Offsetting and Joint Ownership Considerations

FHL losses will now integrate with wider property business profits and losses, enabling offsetting against broader portfolio income. For properties jointly owned by married couples or civil partners, HMRC will default to a 50:50 income split unless an alternative declaration is filed.

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VAT Remains Unchanged

Despite the tax updates, holiday accommodation will continue to be standard-rated for VAT, with no consideration as exempt.

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Strategic Considerations for FHL Owners

These tax adjustments may render short-term holiday lets less appealing for some owners. Nevertheless, there are strategic options to consider:

Selling the Property:

Selling before the changes take effect might enable access to current reliefs, although gains will incur higher taxes post-April 2025.

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Incorporation:

Transferring properties to a company structure may be beneficial, but associated costs like Stamp Duty and CGT must be meticulously evaluated, and may remove future flexibility for succession and tax planning, or bring other taxes such as ATED (Annual Tax on Enveloped Dwellings).

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Property Transfer:

Passing the property to the next generation may serve as an alternative, but will require careful tax planning, as Capital Gains Tax and Inheritance Tax implications will need to be considered.

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Conclusion: Preparing for the Future

These upcoming changes prompt a crucial period for FHL owners to reassess and restructure their financial strategies. Whether you choose to continue in the holiday let market or explore other avenues, the right approach will depend on your specific circumstances. At Mitchell Associates we offer expertise in navigating these complex tax changes. If you wish to discuss how these developments might impact your business and explore strategies to optimise your tax position, please reach out to us for personalised advice.

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