Chichester and the surrounding area is a great place to run a holiday business, especially with the spectacular South Downs and local beaches.
As anyone with a furnished holiday let will know, this tax regime will be abolished from April 2025. What does that mean for you?
A Recap: The Tax Advantages of Furnished Holiday Lets
Here is a recap of the tax advantages that letting as furnished holiday accommodation provided and why you may have opted for this style of letting in the first place:
- No restriction on mortgage interest tax relief
- Capital allowances were available on new purchases of fixed items, as in any other trade
- Capital Gains Tax (CGT) reliefs on the sale of the business, similar to any normal trade
- Flexible profit allocation – Where the business is jointly owned (e.g., by a husband and wife), the individual actively managing the business could be allocated the profits rather than following the default legal ownership proportion (usually 50/50 for spouses)
- Qualifying earnings for pensions – FHL profits counted as qualifying earnings for making pension contributions
What’s Changing from April 2025?
- Tax relief on mortgage interest will be restricted – Finance costs will be restricted to 20% or the basic rate of income tax.
- No tax relief for domestic items – There will no longer be relief for initial purchases of domestic furnishings.
- Pension contributions impacted – Profits from FHLs will no longer count as qualifying earnings for pension contributions.
- Profit allocation changes – Profits will be allocated based on the legal ownership proportion of the property.
Should You Incorporate Your Property Rental Business?
Companies are not subject to the tax restrictions on finance interest, but transferring rental properties to a company could trigger Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT), so caution is needed. If you are considering a property letting business and have not yet purchased properties, you may wish to consider this option.
What About Hybrid LLP Schemes?
To put it simply, HMRC’s view on these arrangements is clear:
‘People who use these arrangements may have to pay more than the tax they tried to avoid, as well as interest, penalties, and high fees for using such schemes.’
www.gov.uk
In other words, they come with significant risk.
Is There Anything Else You Can Do?
If a property is owned by two people and one is carrying out all of the work, a Deed of Trust may be an appropriate way to reflect the larger contribution of one of the owners. However, this should be considered carefully to ensure compliance with tax laws and to avoid potential challenges from HMRC.
Final Thoughts
With the FHL tax regime ending, now is the time to review your property rental strategy. Whether it’s restructuring ownership, incorporating, or adjusting financial plans, careful consideration is needed.
If you need guidance on how these changes will affect you, consulting an accountant can help you make the right decisions for your situation.