Why holiday home owners must start planning now for 2025 tax reforms

Graeme Cran

Graeme Cran

Tax Senior Manager

10 May 2024

As we look forward to the summer season, owners and operators of holiday home businesses will be hoping that better and brighter weather is on the way.

Many will also be hoping for better and brighter news regarding the UK Government’s plans to reform the tax regime for furnished holiday lettings (FHLs).

In the Spring Budget, the Chancellor announced proposals to abolish a number of the tax benefits available to FHL owners, contending that these tax treatments were reducing housing provision for local communities.

But his reforms, which will bring the tax rules for short-term lets into line with the rules for long-term lets, are causing concern within the tourism sector, one of the most important for the Scottish economy with around 14 million visitors annually. Spending by visitors is around 5% of GDP and the sector accounts for more than 7% of employment in Scotland. Without suitable accommodation, the economic value of the sector would quickly diminish.

At present a key advantage of the FHL tax regime is that owners can deduct their full mortgage interest from their rental profits and only pay tax on the balance, whereas standard property rental businesses are restricted to claiming income tax relief at the basic rate of 20%. 

Other benefits afforded to owners of FHLs that are unavailable to owners of standard let properties include access to capital allowances for furniture and white goods, reducing the owner’s taxable income, and the ability to count rental income as relevant earnings for additional pension contributions.

FHL owners also have access to various Capital Gains Tax (CGT) reliefs, including a 10% rate when selling a short-term let property, rollover relief that allows them to defer payment of some or all of the CGT when they sell an FHL and purchase another qualifying business asset, and, importantly, hold-over relief for those gifting on an FHL. In effect, this means owners can gift a qualifying property to a relative, such as a child, and the recipient will not have to pay CGT until they in turn dispose of the FHL.

These benefits are available to FHL owners where they meet stringent conditions. For example, FHLs must be available for rent for at least 210 days of the year and achieve lets for at least 105 days. Lets of more than 31 days are generally ignored for determining if the 105 day test is met.

While the UK Government has good intentions of levelling the playing field and freeing up housing for local communities, what’s needed now is more detail regarding the proposals so that short-term let owner-operators can plan accordingly.

While businesses technically have a year to get their affairs in order, there is currently no draft legislation to help them understand the implications of their decision-making. For example, will gifts of FHLs made before the new regime be subject to it or will they benefit from the existing rules?  And what will happen if mortgage interest rates continue to remain high – do owners need to consider sales to meet their tax bills?

With greater obligations and fewer tax benefits, short-term lets could become unattractive for some owners, driving exits that could in the short-term boost the housing market but in the long-term exacerbate existing shortage of accommodation for key tourism drivers such as gigs, festivals and our much-loved Highland Games, and reduce the opportunity for economy-boosting staycations. The devil will be in the detail.

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