Thousands of holiday homeowners face difficult decisions amid tax changes

• Data by Price Bailey indicates that more than 130,000 UK residents are set to be affected by tax changes on Furnished Holiday Lets.
• This comes as private owners now won’t get full relief for mortgage interest if they are a Higher Rate or Additional Rate taxpayer.
• Findings highlight the number of people with difficult decisions to make.

According to research by one of the UK’s top 30 accountancy firms Price Bailey, more than 130,000 individuals who have income from furnished holiday lettings (FHLs) accommodation in the UK are set to be affected by the removal of tax benefits.

The data, obtained under a Freedom of Information request, highlights a 67% increase in SA105 Furnished Holiday Let (FHL) taxpayer returns between the 2013-14 and 2022-23 financial years, reaching 132,000. While growth rates dipped in 2020-21 in the first year of the pandemic, a spike the following year returned growth rates to a mean average of six per cent per year over the last ten financial years.

The removal of the FHL tax regime will take effect from April 2025 and will harmonise furnished holiday letting with other forms of residential property income. Current tax rules offer beneficial tax treatment for Furnished Holiday Lettings, with exemption from finance cost restriction rules, beneficial capital allowances rules, access to reliefs from taxes on chargeable gains for business assets and inclusion as relevant UK earnings when calculating maximum pension relief.

Andrew Park, a Partner in the Tax team at Price Bailey comments:

“It’s clear that the Government is trying to disincentivise people from using holiday letting to subsidise the ownership of second homes. Repealing the beneficial tax treatment for Furnished Holiday Lets, alongside increasing scrutiny from councils, with some regions charging second homes or holiday homes a premium Council Tax rate of up to 300%, could make running a Furnished Holiday Let and paying the mortgage unviable.

“For those who do continue to operate, their profitability will be squeezed. Everyone will feel the effect of this.”

Park continues: “Although there are other changes too for those with Furnished Holiday Lets – including companies, the most dramatic change is seen for private landlords who now won’t get full relief for mortgage interest if they are Higher Rate or Additional Rate taxpayers – and will end up paying tax on profits they haven’t really made, often with cash that will need to come from other sources.”

Park explains that incorporating their rental properties as a business could be a route for landlords who want to mitigate the effects of the tax changes.

“Companies will continue to get full mortgage interest relief against their profits. Incorporating would typically mean paying Corporation Tax of 19%, since annual profits are normally well below £50k, and then paying personal Income Tax if an owner wants to take cash out of the company.”

Park concludes: “The big thing is, I don’t think that many are going to want to do this through a company and so I do expect that we will see an uptick in owners looking to sell. Fortunately, yesterday’s Autumn Statement has left the special rate of capital gains tax on selling residential properties unchanged at 18% for basic rate taxpayers and 24% for higher rate taxpayers.”

See more on the Price Bailey website here.

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