TTF Tackles the Money Monster Under Your Bed: Landlord Worries

"Owning several furnished holiday lets (FHLs) has been my livelihood for years. These properties, in the main, close by own home on the North-West coast, have been my pride and joy for years, offering guests a home away from home while providing me with income (albeit sometimes inconsistent). As any landlord will tell you, my job isn’t easy. There’s more competition than ever before and many clients these days seem to have champagne expectations on lemonade budgets! What helped keep me afloat…just, was the favourable tax treatment of landlords but now the Budget has really upended this and I’m now worried.

The government’s decision to eliminate preferential tax treatment for FHL landlords has left me feeling deeply concerned about the future. Under the new rules, my rentals will be treated like any other property business, significantly impacting both my income tax liabilities and potential capital gains tax exposure. It is also clear that the inability to claim capital allowances and other business-related deductions will also hit my bottom line hard. With these changes set to take effect from April 2025, I’m left wondering: what are my options, and are there any ways to safeguard my financial stability?

I’ve been advised by friends and family to simply ‘get rid of them’ as they can see how much stress the rentals are causing me. However, again, although I’m no tax expert, I do understand that this isn’t a straightforward solution. The changes to CGT are particularly alarming. Although I’ve retained all my properties, I have seen people in my line of work relying on business asset disposal relief to reduce the CGT payable when selling off an FHL property. Without this relief, If I choose to sell my properties, I face the prospect of significantly higher tax bills and given the recent surge in property values, surely this could result in tens of thousands of pounds in additional tax liability per property?

I’m acutely aware that I need to act fast, as the April 2025 deadline is looming. I’d really appreciate some options and advice to consider as I’ve shelved this problem for long enough and its now time to face up to reality and make some tough decisions."

The Spring Budget 2024 has left many landlords of furnished holiday lets (FHLs) (like yourself) grappling with uncertainty. With the elimination of preferential tax treatments for FHLs, it’s natural to question what steps to take next. Below, we break down the tax changes, explore their potential impacts, and weigh the pros and cons of selling versus retaining your FHL properties.

What Are the Tax Changes?

Under the new rules introduced in the Spring Budget 2024, FHLs will no longer enjoy the preferential tax treatments that previously set them apart from standard property rentals. Key changes include:

Income Tax Treatment: Income from FHLs will now be treated as rental income rather than trading income. This change eliminates benefits such as the ability to offset losses against other income and claim certain pension reliefs.

Capital Gains Tax (CGT): Landlords will no longer qualify for Business Asset Disposal Relief, which significantly reduced CGT rates when selling FHL properties. Instead, CGT on property sales will be charged at higher rates, similar to standard rental properties.

Capital Allowances: The ability to claim capital allowances on furniture, fittings, and equipment used in FHLs will be removed, reducing deductible expenses.

These changes are set to take effect in April 2025, leaving landlords with a limited window to adapt. So you're right to take a proactive stance now.

Possible Impacts on Landlords

The removal of these tax benefits will likely result in:

Higher Income Tax Bills: Without the ability to offset losses or claim trading income reliefs, overall tax liabilities could increase significantly.

Increased CGT on Sales: Landlords selling properties after April 2025 may face substantially higher CGT bills.

Lower Profit Margins: The inability to claim capital allowances and other deductions may erode profit margins, particularly for landlords with high overhead costs. Which is something I know you were particularly concerned about.

Reduced Attractiveness of the FHL Market: For new and existing landlords, the loss of tax advantages could make FHLs a less attractive investment compared to other property ventures or asset classes.

Selling vs. Retaining Your FHL Properties

With the clock ticking toward April 2025, you may be weighing whether to sell your FHL properties or keep them. Here are some factors to consider for both options:

Reasons to Sell:

Avoiding Higher CGT Rates: Selling before April 2025 allows you to benefit from the current CGT reliefs, potentially saving tens of thousands of pounds.

Capitalising on Market Conditions: Property prices in certain areas remain high, offering an opportunity to maximise returns before the market adjusts to the tax changes.

Diversifying Investments: Selling your FHLs may free up capital to invest in other ventures or asset classes with better growth potential and lower tax liabilities.

Reasons to Retain:

Stable Income Source: FHLs can still provide a reliable income stream, especially in popular tourist destinations where demand remains strong.

Potential Tax Planning Strategies: With professional advice, you may find ways to restructure your business, such as incorporating it into a limited company, to mitigate some tax impacts.

Long-Term Appreciation: Holding onto properties could allow you to benefit from future market appreciation, particularly if the rental market continues to grow.

The most important step is to act quickly and strategically. Start by consulting with a qualified tax advisor to understand the full implications of these changes and how they apply to your specific circumstances. They can help you explore:

• Tax-efficient business structures, such as incorporation.

• Opportunities to sell properties before the April 2025 deadline.

• Strategies to optimise rental income and manage expenses.

While the Spring Budget 2024 has introduced significant challenges for FHL landlords, it also presents an opportunity to reevaluate your business strategy and plan for the future. Whether you decide to sell or retain your properties, proactive planning and expert advice are key to navigating these changes successfully.

If you’re looking for expert advice on how to manage the tax changes affecting FHLs, contact our team at The Tax Faculty. We specialise in helping landlords navigate complex tax regulations and can help you make the best decisions for your future.

Capital Gains Tax Expertise: The Tax Faculty LLP Managing Partner Charles Tateson Named UK Capital Gains Tax Advisor of the Year 2023

The Finance Monthly Taxation Awards recognises the achievements of tax professionals from around the globe.

Winning such an award is no small feat. It is a reflection of hard work, extensive knowledge, and an ability to navigate the intricacies of the UK tax system.

Read more about Charles and the award here.

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