Currently qualifying holiday let properties are treated as trading assets which means they benefit from favourable tax treatments and reliefs. However from 6th April 2025, the furnished holiday let regime will be abolished and holiday lets will instead be treated as investment assets, like any other rental property.
At present, interest incurred on loans for the purpose of a furnished holiday letting business are treated as a deduction from rental income in calculating taxable profits of the business.
From 6 April 2025, interest for businesses operated by individuals will cease to be a deduction and relief will instead be given as a 20% tax credit from the individual’s tax liability.
For higher rate taxpayers, this will mean a reduction in tax relief for interest to the 20% rate.
As trading assets, capital gains on the disposal of furnished holiday letting assets by individuals currently may 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, as investment assets from 6 April 2025 such gains will be subject to the Capital Gains Tax (CGT) rate of 18% for profits within the standard rate band or 24% for profits within the higher rate band.
Gains on the disposal of a furnished holiday let 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.
Expenditure on qualifying assets for a furnished holiday letting business are currently eligible for capital allowances.
As a letting of residential investment property, such relief will be withdrawn from 6 April 2025 although it is likely that such businesses may instead be able to claim a deduction from profits for the cost of replacing domestic items.
Tax relief for pension contributions by individuals is currently limited to contributions of the higher of £3,600 or 100% of net relevant earnings.
Currently, profits from furnished holiday lettings are treated as relevant earnings but from 6 April 2025 that will no longer be the case.
These tax changes make it less attractive to own holiday lets and more attractive to sell them which may lead to significant numbers of property owners putting their holiday homes on the market in the 2024/25 tax year.
For more information call Tristan Wilcox-Jones, Samantha Gillham or Lucas Knight on 01225 445507.
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