Furnished holiday lettings (FHLs) enjoy tax advantages not available to landlords letting residential property on long-term lets. The advantages are particularly beneficial when it comes to capital gains tax as landlords disposing of an FHL are able to benefit from a range of reliefs, including business asset rollover relief, business asset disposal relief and gift-holdover relief. However, the special tax regime for FHLs is to come to an end on 5 April 2025. From 6 April 2025 onwards, FHLs will be taxed in the same way as other lets, with gains chargeable at the relevant residential rate. Consequently, if you are thinking of selling or giving away your FHL, or if the property is pregnant with gain, you may wish to consider making the disposal prior to 6 April 2025 to take advantage of the existing capital gains tax reliefs.

Business asset rollover relief

Business asset rollover relief allows any tax due on the sale of an FHL to be deferred where the proceeds are invested in a business asset, for example, another holiday let. Where the full proceeds are reinvested, the gain arising on the disposal is deducted from the base cost of the new asset, increasing the gain when that asset is sold. If only part of the proceeds is reinvested, the gain attributable to the reinvested portion is rolled over and the remainder (relating to the proceeds not reinvested) is immediately chargeable.

To qualify for the relief the new property must be purchased in the period spanning 12 months before and three years after the sale of the old property. The relief must be claimed within four years from the end of the tax year in which the new asset was purchased. The claim is made on form HS290.

Business asset rollover relief is beneficial where the landlord wishes to reinvest as the sale proceeds are not reduced by capital gains tax, leaving more funds available to fund the reinvestment.

Example

Joe bought a holiday let in 2016 for £200,000. He sells it in May 2024 for £350,000, reinvesting the proceeds in full in another holiday let in another part of the country. The new property costs £400,000. Joe claims business asset rollover relief. The base cost of the new property is reduced by the gain of £150,000 on the old property to £250,000. The capital gains tax bill is deferred until the new property is sold.

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Business asset disposal relief

Business asset disposal relief (BADR), which was previously known as Entrepreneurs’ relief, allows a gain to be taxed at the preferential rate of 10% up to the lifetime limit of £1 million. The relief is available to an unincorporated landlord where the business is sold and the landlord had owned the business for at least two years previously. It also applies if the business is closed down and the business assets are sold within three years following the date on which the business ceased.

Example

Julia purchased a holiday let a number of years ago and ran it as a holiday let business, managing all aspects of the business herself. She decides to retire and sells the property in June 2024, realising a gain of £400,000. She has used her 2024/25 annual exempt amount and is a higher rate taxpayer.

As BADR is available, capital gains tax is payable at the rate of 10% on the gain – a tax hit of £40,000.

If Julia had waited until after the end of the FHL regime to make the disposal, assuming the higher residential capital gains tax rate remains at 24%, she would pay capital gains tax of £96,000 (£400,000 @ 24%). Selling before the end of the FHL regime saves her £56,000.

Gift holdover relief

The final capital gains tax relief which is available to FHL landlords is gift holdover relief, which is beneficial if the landlord wishes to give the property away or sell it for less than it is worth, for example, in order to pass it on to his or her children.

For capital gains tax purposes, where an asset is disposed of to a connected person the gain is calculated by reference to the market value of the asset, rather than the amount that the recipient pays for it, if anything. Where a property is given away, this may mean that there is a hefty tax bill to pay but no proceeds from which to pay it. Gift holdover relief overcomes this by allowing the gain to be deferred by reducing the recipient’s base cost.

Example

James has a holiday let that he bought for £150,000. In July 2024 he gives it to his daughter, Jade. At that time, the property has a market value of £325,000. James and his daughter claim gift holdover relief. As a result, Jade’s base cost is £150,000 – the market value at the date of the gift of £325,000 less the heldover gain of £175,000.

Gift holdover relief is useful where the landlord wants to give the property away as it removes the need to find additional funds the pay the associated capital gains tax bill.

Beyond April 2025

The reliefs will cease to apply to FHLs once the favourable tax regime comes to an end in April 2025. Disposals made after that date will be subject to the normal capital gains tax rules for residential property and the usual rates of 18% and 24% will apply.

Residential property gains must be reported to HMRC and the tax paid within 60 days of the completion date.

Disposing of a holiday let prior to the end of the FHL regime may be worthwhile.

Partner note: TCGA 1992, Pt. V (ss. 152 to 169V).