I’m staggered by the number of people that have jumped on to the FHL market in recent years. A perfect storm of tax plus socials issues meant they became a target for many landlords.
Tax wise they enjoyed full deduction of mortgage interest. Socially, Covid meant that more people holidayed in the UK and rental yields for holiday homes surged. No surprise then that people swarmed over to FHLs.
Of course you might call it an SA, Air B’n’B or something else but for tax purposes we are talking about a class of rental called FHL.
In a move that always seemed inevitable to some the government decided that FHLs should no longer attract beneficial tax treatment. This means that changes are afoot for anybody that has one. There are some quite major changes (some which you need to have been planning for a while for) but here are the main ones.
Finance Charges
Until 5th April 2025 FHL owners can deduct full finance charges. 6th April 2025 onward though finance charges (mortgage interest largely) will be restricted in the same was a all other residential buy to lets.
This alone means that some owners will become cashflow negative even if they make a profit. Do not underestimate the power of this change.
Capital Gains Tax
Before 5th April sales of FHLs could qualify for the advantageous 10% tax rate. Many people have purposely sold them or engineered sales to those connected to them to take advantage of the rate.
They also qualifying for “gift relief” which means you can give them away and hold over the capital gains tax on to the recipient. That will end on 5th April.
Profit sharing
FHLs income could be allocated between husband and wife as they saw fit but from 6th April the default will be 50/50 like all other jointly held rentals. If this is not what you want then a formal election to HMRC is needed. It cannot be back dated more than 60 days so getting on with it is a good idea.
Furnishings
FHLs rules give a fairly generous relief for the things you put in to them (as well as things like kitchens, sanitary ware etc) but from April the only relief will be when an item of furnishing is replaced. If you are about to buy a bunch of things get the receipt before 5th April for best results!
Summary
Plenty of things to think about as always. If you aren’t sure how they work then reach out.