The recent budget update has introduced significant changes that will impact owners of Furnished Holiday Lets (FHLs). Here’s a breakdown of the key points:
Changes in Interest Deduction
Currently, interest incurred on loans for the purpose of a FHL business is treated as a deduction from rental income when calculating taxable profits. However, from 6 April 2025, this will no longer be the case for businesses operated by individuals. Instead, relief will be given as a 20% tax credit from the individual’s tax liability. This means a reduction in tax relief for interest to the 20% rate for higher rate taxpayers.
Capital Gains Tax (CGT) Changes
As trading assets, capital gains on the disposal of FHL assets by individuals may currently qualify for business asset disposal relief. Where they qualify, gains up to the lifetime limit of £1m would be taxed at a rate of 10%. However, from 6 April 2025, such gains will be subject to the CGT tax rate of 18% for profits within the standard rate band or 24% for profits within the higher rate band.
Changes in CGT Rollover Relief
Gains on the disposal of a FHL would currently qualify for CGT rollover relief. If a replacement qualifying asset is purchased, a claim can be made to deduct the capital gain from the tax base cost of the new asset, thereby deferring the tax point of the gain. Such relief is only available for investment properties in cases of compulsory purchase.
Changes in Capital Allowances
Expenditure on qualifying assets for a FHL business is currently eligible for capital allowances. However, as a letting of residential investment property, such relief will be withdrawn from 6 April 2025. It is likely that such businesses may instead be able to claim a deduction from profits for the cost of replacing domestic items.
Pension Contribution Relief Changes
Tax relief for pension contributions by individuals is currently limited to contributions of the higher of £3,600 or 100% of net relevant earnings. Profits from FHLs are treated as relevant earnings. From 6 April 2025, individuals who rely on profits of a FHL business to support obtaining tax relief for their pension contributions may need to seek appropriate advice.
Please note: This article is intended to provide a general overview of the changes and does not constitute financial advice. Always consult with a professional advisor for your specific circumstances.