FHLs - What Should You Do Before 6 April 2025

With 7 months to go before Furnished Holiday Lets (FHL) are taxed the same as all other property rents (ASTs), what should you as an owner of a Furnished Holiday Let do before 6 April 2025? If anything? 

These are the questions to ask yourself before going any further:

• Is your FHL business profitable or loss-making?
• Are you planning any significant refurbishments?
• How much is your interest cost? 
• Do you have other income from employment, self employment or a limited company?
• Do you rent out other non-FHL rental properties?
• Are you thinking of retiring or semi-retiring?
• Do you make pension contributions based on FHL income?
• Do you have family members already as part owners or potential part owners?
• Did you start your FHL business recently or several years ago?
• Has the property value increased since purchase?
• Do you carry out a trade beyond simple property letting or might you want to start one?

Your optimum tax efficient answer, will depend on your answers to these questions and probably a few more! Here are a few suggestions based on certain scenarios that we often see:

1. Recent purchase of one FHL property

We've seen an increase in FHL property purchases by employees and business owners since Covid, often funded by borrowings, which could have fed into the previous government's reasoning to change these rules.

Large amounts have often been spent making the property FHL-ready such as buying furniture, crockery, white goods and linen, decorating, safety improvements and adding cupboards. There are therefore carried forward tax losses.

If you've not yet incurred these costs for your FHL, you may wish to do so to benefit from FHL rules which allow tax relief for more costs such as your initial purchases of furniture, crockery, white goods and linen.

The property is expected to be profitable in the future after deducting buy-to-let interest. 

Example ignoring brought forward losses:

• Salary £40,000
• Expected Rental Profit Before Interest £12,000 
• Interest Paid £4,800
• Currently, your income tax bill is: 20% of (£40,000 + £12,000 - £4,800) - £12,570 = £6,926
• From 6 April 2025 your tax bill will become: 20%/40% of (£40,000 + £12,000) = £8,232 less 20% of £4,800 = £7,272
• An increase of £346 every year without an increase in income.
• Another impact from entering the higher rate band is halving your 0% tax band for interest income from £1,000 to £500, potentially adding a further £100 tax cost.
• If your income is nearer to £60,000 before interest and you have children, your child benefit will start to be withdrawn. 
• If your income is nearer to £100,000 before interest, you start to lose your tax free personal allowance!

Your actions might be:

1. Increase pension contributions against your salary to keep your income in the basic rate band, however, this clearly reduces your day-to-day cash to live on.
2. If you're an employee you can't do too much about your salary unless you're thinking of retiring or doing less work.
3. If you're a limited company owner, you may consider reducing the salary-dividends you take out of your company and if the £40,000 is mostly dividend income which won't support personal pension contributions, you'd need to consider replacing some of this with company pension contributions.
4. Increase the rent you charge to compensate for your increased tax cost. You'll no longer be obliged to rent out the property for a certain number of days, so your model can become fewer renters at a higher rent.
5. Shop around for a better buy-to-let mortgage to reduce your interest cost, although we often see this is pretty much under control.
6. Transfer a proportion of your property to your spouse or adult children to spread your income across the family, however capital gains tax will be due on non-spouse transfers at 18%/24% unless you claim 'holdover relief' to delay the tax due until the recipient sells it.
7. If you've owned the property for two years, sell your property before 6 April 2025 to benefit from 10% BADR (Business Asset Disposal Relief) assuming it's not withdrawn on Budget Day.
8. Sit it out, receive a reduced net of tax income and wait for future capital growth.
9. Provide other services and argue that you're carrying out a normal trade, similar to say a B&B or hotel.

Losses - Your brought forward tax losses will be used up more quickly than before, being offset against £12,000 rather than £7,200 (£12,000 - £4,800), but may still offer some delay in the impact illustrated above.

2. Professional landlord with a mix of FHLs and ASTs making an overall profit

Landlords with several properties often without any other significant income may be known as professional landlords. Some properties may be funded by borrowings, and some are more profitable than others, with often a property needing a significant amount spent on it each year. Properties may be owned by both spouses, often also by adult children.

Where a few FHLs are refurbished in the same year, this might cause an overall net FHL tax loss. Currently, losses from FHLs can only be offset against profits from FHLs, ditto ASTs. Moreover, the 

Example after deducting any losses:

• Expected FHL Rental Profit Before Interest £60,000 
• Interest Paid on FHLs £10,000
• Expected AST Rental Profit Before Interest £50,000
• Interest Paid on ASTs £15,000
• Currently, your income tax bill is: 20%/40% of (£60,000 - £10,000+£50,000) - £12,570 = £27,432 less 20% of £15,000 = £24,432
• From 6 April 2025 your tax bill will become: 20%/40% of (£60,000 + £50,000) - £7,570 reduced personal allowance = £33,432 less 20% of £25,000 = £28,432
• An increase of £4,000 every year without an increase in income.

Your actions might be:

1. Increase the rent you charge to compensate for your increased tax cost. You'll no longer be obliged to rent out FHL properties for a certain number of days, so your model can become fewer renters at a higher rent or they might become AST renters.
2. Shop around for a better buy-to-let mortgage to reduce your interest cost, although we often see this is pretty much under control.
3. Transfer more of your properties to your spouse or adult children to spread your income further across the family, however capital gains tax will be due on non-spouse transfers, at 24%. 
4. FHLs allow flexible allocation of profits and losses which will no longer be available. In particular HMRC regards joint spouse ownership to be a deemed 50% share unless they receive a declaration of trust and Form 17 in good time and which can't be done retrospectively. It will be advisable to review this before 6 April 2025. 
5. Transfer FHL properties to non-spouse family members, but claim 'holdover relief' to delay the gains for the recipients to pay 18%/24% on the entire gain when they sell them.
6. Incorporate your property portfolio using capital gains tax incorporation relief to defer capital gains tax otherwise due. However Stamp Duty Land Tax will be a cost which might be a price worth paying for long run control over your income tax position and full tax relief for interest.
7. Sell some FHL properties before 6 April 2025 to benefit from 10% BADR (Business Asset Disposal Relief) assuming it's not withdrawn on Budget Day. You may choose the properties with the highest gain for the maximum benefit. Possibly reinvesting in new properties.
8. If your FHL rents are currently chargeable to VAT, consider whether you may no longer need to be VAT registered.

Losses - If you're planning to refurbish a few FHLs, the new rules allow any FHL tax loss to be offset against both types of rents from 6 April 2025. As the FHL rules allow more costs to be tax deductible, you might bring forward some work to before 6 April 2025 using these rules while you can. You'll still get tax relief either in 2024/25 if you still have enough FHL profits or in 2025/26 agaisnt all properties. Going forward, combining tax losses across FHLs and ASTs is likely to be helpful.

3. Long term owner of a couple of FHL properties, nearing retirement age

You have made fairly steady profits each year and seen a large increase in market value earmarked to enjoy in your retirement. 

These tax changes will cost you 24% capital gains tax instead of 10% and even more income tax than illustrated above once your state pension starts to be paid. You may therefore decide to bring forward your plans. You may even decide to move into one of the properties.

Example:

• Market value £600,000
• Original cost including stamp duty and solicitors £300,000 
• Capital improvements not claimed for income tax £50,000
• Selling costs £10,000
• Tax free annual exemption £3,000
• Capital gain £237,000
• Capital gains tax of 10% is due on £237,000 = £23,700, assuming sufficient lifetime BADR of up to £1m remains available. 
• From 6 April 2025, the capital gains tax due is 24% of £237,000 = £56,880, an increase of £33,180.

Your actions might be:

1. If affordable, maximise pension contributions during this tax year using your FHL rental profits as pensionable income while you can.
2. Cease your FHL property business before 6 April 2025, locking in the favourable 10% BADR rate, ensuring you sell all properties within 3 years of cessation.

Property tax is complicated. It's therefore essential to obtain appropriate tax advice before taking any action suggested above, including Inheritance Tax implications. It's likely some of the tax rates referred to above will increase in the Budget on 30th October, some of which may be immediately effective, so please check those changes at the time.