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Preparing for Tax Changes: Essential Strategies for Furnished Holiday Let and Serviced Accommodation Owners
5 September 2024
Property Investors & Developers
In the spring of 2024 the government announced the abolition of the Furnished Holiday Lettings (FHL) tax regime.
HMRC have now released the policy paper Abolition of the furnished holiday lettings tax regime and here we look at the key changes, the impact and what you can do to reduce the impact of the shift.
Capital gains tax
Currently, if you sell your FHL, you may qualify for Business Asset Disposal Relief, allowing you to pay a reduced capital gains tax rate of 10% or 20% after the first 1 million.
However, from April 2025 this will be subject to standard capital gains tax rates ranging from 18% to 24% depending on your income level (keep an eye on labour’s first autumn statement on 30 October 2024).
This will result in a substantial increase in the tax you pay when selling your property.
What can you do?
- Consider selling before the new rules take effect.
- Explore tax-efficient strategies to mitigate the impact i.e portfolio structuring reviews.
No More Capital Allowances for Fixtures and Fittings
Currently, you can claim capital allowances for replacing fixtures and fittings in your FHL, which provides tax relief on these expenses.
However, under the new rules, this will no longer be possible.
This change could lead to higher taxable profits, as you will fully incur the cost of these replacements without any tax offset.
What can you do?
- Plan major refurbishments before the rules change.
- Plan ahead and ensure you factor in these additional costs when budgeting for the future.
Default 50/50 Profit Split for Married Couples
For married couples, the profits from your FHL or Serviced Accommodation business will automatically be split 50/50 between both spouses unless you have a Form 17 in place.
If one partner is a higher rate taxpayer, this could result in a significantly higher tax bill.
What You Can Do:
- If applicable, file a Form 17 to declare a different ownership ratio.
- Assess the structure of your business to ensure tax efficiencies.
Limited Tax Relief on Mortgage Interest
Under the current regime, you may be eligible for higher rate tax relief on mortgage interest.
However, after April 2025, only basic rate tax relief will be available.
This aligns the tax treatment of FHLs more closely with regular buy-to-let properties and could increase your overall tax liability, particularly if you’re a higher rate taxpayer.
What You Can Do:
- Review your financing options and consider paying down debt.
- Speak with your accountant to understand how this change will affect you.
Restrictions on Pension Contributions
After the new rules come into force, pension contributions will be limited to 100% of your earned income, capped at £3,600 gross per tax year if your primary income is from investments or rentals, which are not considered earned income.
This could impact your retirement planning, particularly if you’ve been using rental income to boost your pension savings.
Again pay close attention to the autumn statement as changes to pensions have been mooted.
What You Can Do:
- Consider making additional pension contributions before 5 April 2025.
- Re-evaluate your long-term financial planning strategy.
Incorporating Your Business
With changes on the horizon, now might be the right time to consider incorporating your Furnished Holiday Let or Serviced Accommodation business.
Operating as a limited company could provide different tax advantages, particularly in light of the upcoming rule changes.
However, incorporation comes with its own set of challenges and costs, so it’s important to weigh the pros and cons carefully.
What You Can Do:
- Speak to us about reviewing your portfolio and we can assist you in assessing whether incorporation is right for you.
Final Thoughts
The upcoming changes to FHLs and Serviced Accommodation rules are significant and could greatly impact your business and finances.
With the final details still pending, now is the time to stay informed and proactive.
By understanding the new rules and seeking professional advice, you can safeguard your investments and minimise any adverse effects.
Getting in Touch
If you have any questions or would like to discuss how these changes could impact you, reach out to us today.
Planning now could save you a considerable amount of time and money in the future.
Our services
If you would like to find out more about some of our services that might help you please take a look at our related pages:
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The content in this blog is correct as of 5th September 2024. See terms and conditions.
