The Autumn Budget on 30 October is approaching, and while the exact tax changes it will bring remain uncertain, one change set to take effect next year is already causing concern for owners of holiday properties. Currently, holiday homes that are rented out for at least 210 days a year, with at least half of that time effectively let out, can qualify as furnished holiday lettings and enjoy various tax benefits. However, from April 2025, these properties will be treated the same as regular buy-to-let properties.
This change will have a significant impact on property owners, especially those with mortgages on their holiday homes. Currently, full tax relief on mortgage interest is available, but starting next tax year, only a 20 per cent tax credit will be provided. This means that higher or additional-rate taxpayers will lose out on valuable tax benefits.
In addition to changes in mortgage interest relief, tax relief on home improvements is also set to change. While currently, capital improvements such as installing a new kitchen or bathroom can be fully tax-deductible, from April 2025, tax relief will only be available for repairs and replacements, not for capital improvements. This shift may prompt property owners to consider making any planned improvements before the deadline.
Furthermore, income from holiday lets will no longer be considered “relevant” earnings for pension contribution purposes starting next year. This change may limit the ability to receive tax relief on pension contributions if holiday let income is a primary income source.
When it comes to selling a holiday let property, the tax implications are also set to change. Currently, business asset disposal relief allows for up to £1 million of gains to be taxed at 10 per cent during a lifetime. However, from next year, selling a holiday let property will be subject to capital gains tax, which is currently levied at 18 per cent or 24 per cent on residential property, depending on the individual’s income tax bracket.
Considering these impending changes, property owners may want to evaluate their options, including potentially selling before the changes take effect or incorporating their holiday let into a company structure. While there are pros and cons to each approach, careful consideration of the tax implications is essential.
As the tax landscape for holiday properties evolves, it is crucial for owners to stay informed and proactive in managing their investments. With tax efficiency in mind, exploring different strategies and seeking professional advice can help navigate the changing tax environment for holiday lets.