The new Chancellor, Rachel Reeves, made an Economic Statement to the House of Commons this week in which she set out some of Labour’s next steps and priority tax commitments ahead of the next budget which will be held on 30 October.
Amongst the announcements was the publication of some draft legislation to remove the beneficial tax arrangements of the furnished holiday let regime. This had been mentioned in the previous budget on 6 March, but this is the first time we have seen how it might be done.
Changes will take place from 6 April 2025 for income tax, and a summary of the main proposals is as follows:
- Furnished holiday let income currently benefits from a full deduction of mortgage interest; this is to be changed so that only basic-rate relief is given, as for other residential letting income
- Income from furnished holiday lets counts towards your total income when considering the amount of pension contributions you can make in a tax-year; this income will be excluded, as other residential letting income is already.
- Capital allowance rules will no longer apply for furnished holiday let businesses; instead replacement of domestic items relief will apply as for other residential letting income. The main practical difference here is that you would not receive a tax deduction the first time you purchase an asset, such as kitchen appliances or furniture. Instead you would only receive a tax deduction for the replacement of these items.
- Income from residential property that is held jointly by spouses is deemed to be split equally between those spouses unless the legal ownership of the property is actually held in different proportions. At the moment, this does not apply to furnished holiday let income which can be split in any way year on year but this will change from April 2025.
Changes to capital gains tax will also take place from 6 April 2025 and capital gains tax reliefs will no longer be available for furnished holiday lets.
One example is rollover or re-investment relief: currently if the proceeds of the disposal of a furnished holiday let were to be re-invested into qualifying assets then some or all of the gain could be held over and only taxed once that second asset was sold.
Another is business asset disposal relief which applies a beneficial capital gains tax rate of 10% to certain transactions; this will no longer be available for furnished holiday lets.
If you have any concerns or questions about any of these measures please get in touch.
