Time is running out for farms running furnished holiday lets to maximise tax savings, as new rules come into force in April 2025.
Owners of furnished holiday lettings (FHLs), including farmers and landowners, have a narrow window to maximise a number of existing tax advantages.
This is according to NFU Mutual, which explains that these advantages will be abolished under new legislation due to come into force next April.
To qualify as an FHL for tax purposes, a property must be available for hire for 210 days, and let for 105 days or more, within each tax year.
Lettings to families and friends at zero or reduced rates are not counted.
The forthcoming legislation, which was announced in the spring budget, has been designed to harmonise the tax regime for FHLs with the long-term rental market.
Despite the subsequent change in government, it was recently confirmed that the new regulations will be implemented as planned.
The new rules include a wholesale change to capital allowances, as Sean McCann, chartered financial planner at NFU Mutual, explains.
“Currently if you spend money on improvements such as putting in a new kitchen, bathroom, or central heating you can claim 100% tax relief (within limits).
"From April 2025, you will get tax relief on repairs to the property, replacing furniture or washing machines, but not for capital improvements.
"If you are planning to put in a new kitchen or extend the property, it may make sense to do these before April 2025."
Another key change is that the profits from FHLs will no longer be treated as earned income for pension purposes.
This means there is an opportunity to maximise pension contributions for the current year and take advantage of any unused allowance from the previous three years, Mr McCann says.
“But it is perhaps the new rules around Capital Gains tax (CGT) that require the most immediate attention, particularly among those who might already be thinking about selling their holiday let.”
Furnished holiday lets are currently treated as ‘trading businesses’ and can take advantage of various CGT reliefs when selling or giving away the property.
However, this will change in 2025. Selling or giving away a property is treated as a disposal for CGT – with any gain taxed at 18%, if in the basic rate band, and 24%, if in higher rate bands.
“If disposing of your holiday let was already in your plans, there may be benefits in doing so before the changes come into force,” explains Mr McCann.
“On selling the property, you may be able to claim Business Asset Disposal relief – which allows you to have up to £1m of gains during your lifetime taxed at 10%.
“In a scenario where you are selling and buying a new FHL, or other qualifying trading asset, you can ‘roll over’ all or part of the gain, which allows you to defer all or part of the CGT payable.
“Or if you are gifting the property, you and the person you are giving it to can claim ‘Gift Hold over relief’. This means, there is no CGT at the time of the gift and any CGT is ‘held over’ until the new owner disposes of it."
He concludes: “The bottom line is that if you’re planning to sell or gift your FHL in advance of the changes, it’s important to take advice so you’re aware of all the implications before you make a decision.
