The Spring budget brings about many changes relevant to all taxpayers in the UK. From April 06, 2025, owners of furnished holiday lets (FHLs) will no longer be eligible for their tax breaks, meaning they are subject to the same playing field as residential landlords. This can massively affect your profit levels and the tax you pay, raising the question of whether it's time to sell.
FHL businesses already have tight budgets, so it's important to understand how these changes will affect you. Reduced tax relief for mortgages
Currently, FHLs benefit from being able to claim full tax relief on the cost of their mortgage interest. However, tax relief will be capped at 20%, which will massively affect the tax paid by higher and additional rate taxpayers; here's how it will look if your mortgage interest costs are £5000:
FHL Mortgage Tax Relief for £5000 mortgage interest | Current Tax Relief | Tax Relief From April 6 2025 |
£70,000 Profit (higher rate taxpayer) | £5000 x 40% = £2000 | £5000 * 20% = £1000 |
£30,000 Profit (basic rate taxpayer) | £5000 * 20% = £1000 | £5000 * 20% = £1000 |
Higher capital gains tax
FHLs will also no longer benefit from paying reduced Capital Gains Tax (CGT) when selling their property. This will massively influence people's decisions on whether or not to sell their FHL, as they can do so before April 06 2025 and still make use of the reduced CGT rates, here's how the changes will look:
CGT when selling your FHL | Before April 06 2025 | After April 06 2025 |
Basic Rate CGT | 10% | 18% |
Higher Rate CGT | 10% | 24% |
The reason FHLs only pay 10% is because they qualify for Business Asset Disposal Relief (BADR); it's important to note that the lifetime limit for BADR is £1 million, which applies to all qualifying business asset disposals, not just FHLs.
Potential impact on pension contribution tax relief
Profits from FHLs will no longer be classified as relevant earnings for pension contributions. This means the total tax relief you are eligible for may be reduced if you rely on your qualifying FHL profits. The following 2 examples show the current difference between residential lets and FHLs in terms of tax relief from pension contributions. Remember that after April 06 2025 FHLs will work the same as residential lets: Example 1: FHL Income + PAYE Income
Earnings: £20,000 PAYE (relevant earnings) + £20,000 FHL (relevant earnings) = £40,000 total earnings
Contribution: £40,000
Tax Relief: Since both FHL and PAYE income are considered relevant earnings, you'll receive tax relief on the full contribution amount of £40,000 (assuming your tax rate is 20%: £40,000 * 20% = £8,000 tax relief)
Example 2: Residential Rental Income + PAYE Income
Earnings: £20,000 PAYE (relevant earnings) + £20,000 Rental (not relevant earnings) = £40,000 total earnings
Contribution: £40,000
Tax Relief: Only your PAYE income qualifies for tax relief on pension contributions. So your total possible tax relief will be capped at £20,000 relevant earnings (assuming your tax rate is 20%: £20,000 * 20% = £4,000 tax relief). The £20,000 rental income contribution won't receive upfront tax relief.
Is it time to sell?
Selling your FHL before April 06 2025 offers a clear benefit of only being subject to 10% CGT. Also, keeping it past that point may be expensive and stressful for many landlords struggling with current budgets and margins. After April 06 2025, there will be more tax to pay when you sell your FHL, less tax relief on mortgages and fewer benefits to your pension. If you think these changes will have a strong negative impact on you, then it may be time to sell before the CGT rates go up.
In addition to the changes to FHLs in 2025, the higher CGT rate will be reduced from 28% to 24% after April 06 2024. It's clear the government wants to free up the housing market by encouraging landlords to sell, hopefully benefiting first-time buyers and generating tax revenue for the government. If you have any questions or need help with your accountancy needs, please get in touch.