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March 22nd 2024

Changes to the Furnished Holiday Let Tax regime could affect your taxes

Furnished Holiday Lets (FHLs) have always been a popular investment choice due to their favourable tax treatment and the fact they offer a suite of advantages from capital allowances on plant and machinery to specific Capital Gains Tax (CGT) reliefs.

However, the recent Spring Budget brought a significant announcement – the abolition of the special tax regime for FHLs from April 2025.

This move is expected to reshape the landscape for FHL property owners and businesses, signalling the end of an era of specific tax benefits that have until recently been a boon to investors.

What changes has the Government made?

The Government has decided to eliminate the favourable tax regime for FHLs, effective from April 2025.

This decision impacts both Income Tax and Capital Gains Tax treatments for properties that previously qualified under the FHL criteria.

The anticipated changes include the cessation of capital allowances claims on plant and machinery and alterations to the definition of ‘net relevant earnings’ for the purpose of tax relief on pension contributions.

Additionally, various Capital Gains Tax reliefs will no longer be applicable.

Capital Gains Tax considerations

Central to the appeal of FHLs has been the availability of Business Asset Disposal Relief (BADR), previously known as Entrepreneurs' Relief, where specific conditions are met.

This provision has enabled a reduced CGT rate of 10 per cent on gains from the disposal of FHL businesses, up to a cap of £1 million over an individual's lifetime.

This rate significantly undercuts the standard CGT rates on residential property sales, which are 18 per cent for basic rate taxpayers and 28 per cent (soon to be reduced to 24 per cent) for those in higher tax bands.

BADR's applicability to FHLs effectively positioned them not merely as property investments but as bona fide business ventures, offering a tax-efficient exit path that far surpassed the benefits available to other types of property investment in terms of potential tax savings.

However, the cessation of the FHL-specific tax regime is going to be a dramatic overhaul in the CGT treatment for these properties.

The forthcoming changes spell the end of the ability to claim Business Asset Disposal Relief on the sale of FHL businesses.

Consequently, gains from the sale of FHLs will attract CGT at the standard residential property rates of 18 per cent or 24 per cent, depending on the taxpayer's income bracket.

This adjustment not only eliminates the preferential CGT treatment formerly available to FHLs but also realigns their tax treatment closely with that of other residential property investments.

This realignment is set to increase the tax liabilities for owners upon the disposal of FHL properties, potentially leading to a significant uptick in tax burdens.

Beyond impacting immediate financial returns from the sale of FHL properties, this change also has far-reaching implications for investment strategy and the allure of FHLs as a tax-advantaged investment channel.

Investors currently benefiting from the special tax considerations for FHLs will need to reassess the long-term sustainability and profitability of these investments, in light of the impending increase in tax expenses associated with future disposals.

With the CGT treatment of FHLs set to mirror that of other residential properties more closely, investors may be compelled to look towards alternative property investment options or diversify their investment portfolios to preserve tax efficiency and achieve their financial objectives.

What should you do next?

The abolition of the FHL tax regime means you will need to perform a re-evaluation of the financial and operational aspects of owning FHL properties.

Property owners will need to prepare for transitional adjustments and keep an eye out for draft legislation, including measures aimed at preventing the abuse of these rules before their complete abolition.

With the shifting ground under the FHL regime, you may find it advantageous to consider other avenues.

Residential or commercial property investments, REITs (Real Estate Investment Trusts), or even diversifying into different asset classes altogether could provide new opportunities for growth and tax efficiency.

Each investment strategy comes with its own set of tax implications and potential benefits, so it’s important to talk to a qualified tax adviser on these issues.

For tailored advice based on your own personal situation, please reach out to one of our team of experts.

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