Looming tax changes around furnished holiday lets will prove challenging for landlords and those looking to buy, says Handelsbanken Wealth & Asset Management.
Under current rules, furnished holiday lets include more favourable tax rules than traditional rented assets, across both income and capital gains tax. However, from 5 April 2025, the regime will be abolished as part of the government’s efforts to address housing market distortions, simplify regulations and raise funds.
The new rules will mean that interest on borrowings, such as mortgage interest and associated financing costs, will no longer be fully deductible when calculating taxable profits from a rental property. In addition, the government will also scrap various capital gains tax reliefs for owners, including business asset disposal relief, business assets rollover relief and gifts holdover relief.
The changes will also mean that owners will no longer be able to claim tax relief on the original cost of domestic items purchased for use in the property.
Mark Collins, head of tax at Handelsbanken Wealth & Asset Management, said: “With holiday season around the corner and a significant shift in the tax regime on the horizon, it should come as little surprise that we’ve seen a significant uptick in advice requested by customers thinking about selling their current holiday let property, or halting the buying process altogether. With the planned changes all designed to bring tax rules for holiday lets into line with tax rules for other residential property lettings, it is crucial for current or potential owners to understand what this means for them.”
Where a holiday let is owned jointly by spouses or civil partners, by default each partner will be liable for tax on 50% of the rental profits. Collins warns that this could have significant consequences for anyone whose income is close to the threshold of a higher income tax bracket, increasing their personal income tax burden.
He added: “While there is no getting away from the changes being made to the tax rules, in general terms, there are some changes that you could make between now and April of next year to sidestep some of the impact.”
Handelsbanken Wealth & Asset Management says holiday let owners should submit a formal application with their partner to avoid being taxed equally, consider selling the property to make the most of the current ‘business asset disposal relief’ rules, or give the property away to a family member before the coming tax year in order to claim ‘gift holdover relief.’
