Residential rental market – more pain and the alternative furnished holiday let solution

Just when you thought there was a let up in the Government’s apparent war against landlords, the ‘Renters Reform Bill 2022’ is now lurking in the shadows. The Bill looks to ban Section 21 ‘no fault evictions’ and introduce measures to ensure that properties are maintained to a certain standard.

Whilst it is of the utmost importance that all tenants have the right to live in clean and safe accommodation, without being evicted for no good reason, it is envisaged that more landlords will simply look to cease letting activities altogether, rather than continue operating under even tighter rules. It is anticipated that gaining possession of rented properties to sell or move into will become fraught with difficulties.

So what are the alternatives? Well, if your residential let is in an area that is attractive to tourists or short-term business visitors, you could serve notice now and relaunch the property as a furnished holiday let. There are numerous advantages in doing so, five of which are highlighted below:-

Business asset disposal relief

Formerly known as ‘Entrepreneurs Relief’, this allows FHL landlords to take advantage of a 10% rate of tax on £1,000,000 worth of gains in their lifetime.

If the property has qualified as an FHL for two years, you can take advantage of this lower rate instead of paying 18% (basic rate) or 28% (higher and additional rate) Capital Gains Tax (CGT) on the sale of a property that has been let on a regular AST up to the date of sale.

Those landlords with properties in locations popular with short term visitors such as UK seaside resorts may wish to consider reviewing whether an FHL would be feasible.

Rollover relief

When selling one FHL property, you could opt to ‘roll’ the gain over into the purchase of a more expensive property, which provides a greater annual yield.

You could do this with consecutive property purchases, never paying tax on any of the transactions during lifetime, whilst continually scaling up operations.

On death, there is a free uplift to market value for CGT purposes and the good news is, the deferred (or rolled over) gains are not revived and so are effectively washed out.

Gift relief

Another advantage to owners of Furnished Holiday Lets is the ability to hand their properties down to future generations without incurring any CGT.

The availability of Gift Holdover Relief on the transfer of property to another individual means that there is no gain at the point of transfer and instead, the recipient takes on the base cost of the transferor. For example, if a father acquired a property for £250,000 and made a transfer five years later to his son when it was worth £500,000, the gain of £250,000 would not be charged to tax and instead, the son would take on the original £250,000 base cost.

It is worth noting that the transfer is a Potentially Exempt Transfer for CGT purposes so the transferor would need to survive for another seven years for the value to be outside their Estate for Inheritance Tax (IHT) purposes.

Capital allowances

Perhaps one of the biggest advantages is the ability to claim capital allowances on plant and machinery embedded within an FHL. A claim can include integral features such as heating and lighting systems and enable up to 25% of the cost of acquiring the building to be written down against your profits.

Any losses incurred following a claim can be carried forward, meaning that rents from FHLs can be effectively wiped out for several years.

Use of the property

There are conditions set out by HMRC that landlords need to meet for their property to qualify as an FHL. The two main conditions are that it needs to be let for 105 days and available for letting for 210 days in any given tax year, although HMRC do allow some flexibility through averaging where a landlord falls short of those targets.

Unlike an AST, you can use the property yourself outside of the 210 days you need to market the property for letting. The only (small) drawback is that you must apportion a proportion of some annual costs to your stay and disallow them in the income and expenditure accounts!

Deduction of mortgage interest

For those landlords who pay tax in the 40% or 45% bracket, the restriction of relief to 20% when owning heavily leveraged properties has been costly.

There are no such restrictions for furnished holiday lets and because it is deemed to be a business rather than purely a passive investment, you can also allocate profits in whichever shares are most tax efficient, without having to register any kind of beneficial ownership election with HMRC.

If you are a landlord and require advice on any aspect of property taxation, please contact Paul Webster on 01634 899800 or any other member of our Tax Team here .