Date
20 Mar 2024Category
TaxIt appears that just about every Government Budget brings further unwelcome changes to property taxes and the taxation of landlords, and Jeremy Hunt’s recent announcement was no exception. This time it was landlords running short-term holiday lets who were in for a shock.
The Furnished Holiday Letting (FHL) rules have been in place since the early 1980s and have resulted in this type of letting being treated more as a trade than other types of property income. This has brought a number of significant benefits to these landlords. The Chancellor’s announcement that the FHL benefits will be abolished from 6 April 2025 means landlords running such properties need to consider what this will mean for them.
The profits from FHLs have been classed as net relevant earnings for pension contribution purposes. An individual with no other sources of net relevant earnings, for example employment income or self-employed/partnership profits, has been able to make greater contributions by virtue of having FHL profits. This means they have not been limited to the stakeholder amount of £3,600 gross. From 6 April 2025, with no other source of relevant earnings, landlords of FHL properties are going to be limited to the stakeholder pension contribution amount.
For the past few years, landlords with non-FHL properties have been subject to mortgage interest relief restrictions. This means that any mortgage interest paid is not available as a deduction from rental income but instead once the tax liability in relation to the rental profit has been calculated, 20% of the mortgage interest paid is available to reduce the liability. Landlords of FHLs were not subject to the mortgage interest restriction and could therefore deduct the sums paid in full. From 6 April 2025, landlords of short-term holiday lets will be subject to these restrictions.
Landlords starting out with short-term holiday lets have benefited from the ability to claim a full tax break for their spend on qualifying plant & machinery under the capital allowances regime. From 6 April 2025, this will no longer be available. As such, expenditure on new items will not be allowable as a tax deduction after 6 April 2025, but expenditure on replacement items of furniture, furnishings and appliances will be allowable. This will represent quite a change for landlords, who often spend significant sums in the pre-letting phase of short-term holiday lets, in order to attract visitors, and who will no longer get a tax break for this up-front spend.
Some hoped that the withdrawal of the FHL tax reliefs would be balanced by the Government removing FHLs from the VAT regime. This, unfortunately, is not the case, and the letting of holiday accommodation remains liable to standard-rate VAT. Businesses and individuals operating in this market should ensure they monitor their turnover closely and register for VAT at the appropriate time. Where a business’ turnover exceeds the VAT registration threshold (currently £85,000 and rising to £90,000 on 1st April 2024) it must notify HMRC within 30 days. While VAT registration may ultimately impact on profitability, businesses that are required to register for VAT, should ensure they recover all relevant VAT incurred on expenses.
Perhaps the greatest blow to short-term let landlords relates to the loss of a number of CGT reliefs. Draft legislation in relation to the withdrawal of these reliefs will be published in due course and will include anti-forestalling rules effective from 6 March 2024, which will prevent the obtaining of a tax advantage through the use of unconditional contracts to obtain reliefs under the current FHL rules. So no more access to holdover relief, rollover relief or Business Asset Disposal Relief (BADR). The one positive for landlords who choose to sell was the announcement that the top rate of CGT on the disposal of residential property will drop from 28% to 24% from 6 April 2024.
The justification of the withdrawal of these tax rules was stated to be a means of helping people find long-term accommodation in their local area. However, the lack of accommodation has in some areas been as a result of the targeted withdrawal of tax reliefs for landlords, many of whom have simply withdrawn from the private rented sector. The availability of short-term lets in key tourist areas are essential to encourage visitors, who bring a welcome boost to any local economy and it may be that in areas where the vast majority of tourist accommodation is in holiday cottages, if landlords do sell up, local hotels and bed and breakfasts will not be able to keep up with the demand.
Landlords need to be aware what this change will mean for them from 6 April 2025, and only time will tell whether there will be a further mass exodus from the rental market and what the long-term effects on tourist areas might be.
If you’re affected by the impending abolishment of the Furnished Holiday Letting rules and have any questions on dealing with the impact, please get in touch with a member of our specialist team or your usual Azets advisor.
