Looming deadline for furnished holiday lettings sales

The countdown to the end of the current tax year on 5 April 2025 marks a critical point for owners of furnished holiday lettings (FHLs) as the beneficial tax regime comes to an end. With only five months remaining, planning is essential to maximise current reliefs and manage liabilities effectively, but the good news is that there are still options available.

1. Selling FHLs before 5 April 2025 to bank lower capital gains tax rate

For those ready to exit the FHL market, selling the business outright before the end of the tax year is a straightforward way to claim the lower tax rate of 10% associated with Business Asset Disposal Relief (BADR) which is currently available to qualifying FHL businesses.

For those considering a sale, time is of the essence to ensure the business and the disposal meet the conditions to benefit from the relief and crystallise a sale ahead of 5 April 2025.

2. Ceasing the FHL business before 5 April 2025 and selling within three years

If continuing the business is no longer viable now the FHL regime is due to come to an end, ceasing FHL activity altogether before 5 April 2025 may simplify matters. Provided that the business ceases by 5 April 2025, you may still be able to qualify for the lower rate of tax under BADR if the property is then sold within three years of cessation, and if the FHL has been operated as a trading business for at least two years prior to cessation.

This approach avoids ongoing compliance burdens while preserving the potential for relief if assets are retained and sold at a later date. Although the rate of BADR is set to increase to 14% from 6 April 2025 and 18% from 6 April 2026 thereafter, this is still lower than the maximum rate of 24% applied to other residential property disposals.

3. Transferring the FHL business to a company

For heavily indebted businesses impacted by the mortgage interest restriction rules, incorporating the FHL business may offer long-term tax advantages such as potentially full deductibility of mortgage interest in a corporate structure and lower corporation tax rates (between 19% to 25% depending on the level of profit), compared to income tax rates.

However, other significant costs must be considered such as property stamp taxes (stamp duty land tax, land transaction tax or land and buildings transaction tax, depending on where the properties are situated in the UK) and capital gains tax on the transfer to the company, ongoing company compliance costs, and the potential for a double layer of taxation on cash extraction from the company.

4. Continuing FHL business as a rental business

For those looking to continue their business and transition to a standard rental business, it is essential to consider the key differences between the FHL regime and the tax regime that applies to a standard residential property rental business, including:

• Basic rate tax restriction on mortgage interest relief.
• Reduced entitlement to capital gains tax reliefs (including no entitlement to BADR).
• No capital allowances on the majority of new expenditure (replacement of domestic items relief may be available instead).
• Rental profits will automatically be allocated equally between joint owners who are married/civil partners, unless a Form 17 is submitted to HMRC to show that ownership is in unequal shares. 

The final point may be of particular interest; profits of an FHL business can be allocated freely between spouses in differing proportions, which may be changed each year. However, once the FHL regime is abolished, this will not be so easy. Where ownership of the property is unequal between spouses, a Form 17 may need to be submitted to HMRC to formalise the unequal profit split for tax purposes. In absence of a Form 17, the owners will be taxed on profits split equally. For taxpayers who previously benefitted from sharing profits in differing proportions, whilst owning FHLs equally, further legal and tax support may be required in changing the ownership split from 50/50 between spouses to benefit from this at all.

The path forward will depend on individual circumstances, including debt levels, potential capital gains tax liabilities, property stamp tax implications, and long-term objectives. With 5 April 2025 approaching, now is the time for those with FHL businesses to explore their options and implement a strategy.