In the Spring Budget, the Chancellor introduced notable changes to UK real estate taxation. These include scrapping a tax regime that favoured landlords offering short-term furnished holiday rentals and ending multiple dwellings relief for Stamp Duty Land Tax (SDLT) purposes, deemed outdated. Conversely, there’s a reduction in Capital Gains Tax (CGT) rates for residential property sales from 28% to 24%, anticipated to increase government revenues.
Further information and draft legislation are expected on the proposed changes. This article simply highlights what has been announced so far, with some thoughts on what the changes may mean to property owners or investors, and the feasible options to mitigate any adverse impacts.
The Existing Landscape for Furnished Holiday Lets (FHLs):
Since the 1980s, a specialised regime has facilitated the letting of furnished holiday properties commercially, buoyed by the rise of platforms like Airbnb. This regime includes several tax advantages.
Landlords can fully deduct interest and finance costs from their rental income, potentially qualifying for relief at rates as high as 45%. Moreover, they’re eligible for capital allowances on qualifying plant and machinery, which can provide up to 100% relief in the year of expenditure.
When it comes to selling properties, landlords enjoy further advantages, with gains qualifying for Business Asset Disposal Relief (BADR) up to £1 million, subject to a favourable tax rate of 10%. Alternatively, gains may qualify for Capital Gains Tax (CGT) hold-over/roll-over relief, delaying payment of tax to a later time. Plus, rental profits are considered net relevant earnings for pension purposes, offering another avenue for financial planning and investment.
Proposed Changes to FHLs:
The Chancellor announced the abolition of the FHL regime, effective from April 2025, citing concerns over housing availability in certain holiday areas due to the surge in buy-to-let activity. This move aims to create a fairer property tax system and a ‘level playing field’ for short-term and long-term lettings. The abolition is projected to yield annual revenues of up to £245m by 2028/29.
The Tax Implications:
The proposed changes in taxation for landlords herald significant adjustments, which could reshape their financial landscape. One notable change includes restricted relief for interest and finance costs, limited to the basic rate of 20%. This alteration is set to increase tax exposure on rental profits, potentially impacting the overall profitability of property investments.
Moreover, the disqualification of capital expenditure for capital allowances is anticipated, with a shift towards domestic items relief. This change may result in a deemed disposal of assets, potentially leading to a clawback of allowances, although any transitional relief might mitigate this. It’s wise to ensure all pertinent claims have been made to minimise the impact of any clawback.
The benefits previously enjoyed, such as the Business Asset Disposal Relief (BADR) and the lower 10% tax rate, would no longer apply to profits from a sale. Additionally, capital gains would no longer be eligible for Capital Gains Tax (CGT) holdover or rollover relief. Anti-forestalling measures are expected for individuals intending to sell Furnished Holiday Lets (FHLs), although the specifics are awaited. It’s worth noting that the tax rate on gains from the sale of residential properties has decreased from 28% to 24%, which could serve as an incentive for landlords to consider selling their properties sooner rather than later.
The loss of net relevant earnings status for pension purposes poses challenges too, potentially impacting retirement plans for landlords. These changes underscore the need for careful consideration and strategic adaptation in navigating the evolving taxation framework for property investments.
Options for Property Owners and Investors:
Landlords facing the loss of tax advantages may opt to pursue longer-term tenancies as a strategy to maximise rental profits. This approach aims to offset the financial impact of the changes by securing stable income streams over extended periods.
Another consideration is the incorporation of the Furnished Holiday Let (FHL) portfolio, leveraging lower corporation tax rates. However, this choice comes with potential implications such as Stamp Duty Land Tax (SDLT) liabilities and the prospect of double taxation upon property sale. So, you need to assess things carefully.
Alternatively, landlords may choose to argue for trade status, seeking to revert to pre FHL conditions by introducing ancillary services. This approach, while potentially contentious, could offer a pathway to retaining favourable tax treatment.
Finally, now could be an opportune time for landlords to consider selling their property, especially with the Capital Gains Tax (CGT) rate for residential property sales reduced to 24%. This move seems geared towards promoting sales to bolster housing availability. The government anticipates this rate adjustment will lead to an increase in CGT revenue, peaking at £350 million in 2025/26, before stabilizing at more modest levels by 2028/29. Each option presents distinct considerations, highlighting the need for landlords to carefully weigh their choices in response to the evolving tax landscape.
Multiple Dwellings Relief (MDR):
Multiple Dwellings Relief (MDR) was originally introduced as an incentive to stimulate investment in the private rental sector. It works by lowering the effective Stamp Duty Land Tax (SDLT) rate when purchasing two or more dwellings within a single transaction (or linked transactions).
The relief is estimated to cost the government £700 million annually. A 2021 consultation on mixed property rules and Multiple Dwelling Relief (MDR) determined that reform was necessary to combat abuses. Presently, it’s observed that the relief fails to fulfil its purpose of stimulating investment, instead leading to numerous erroneous claims initiated by ‘tax reclaim agents,’ all of which require scrutiny and often face challenges from HMRC. It appears that the relief has transformed into a burdensome process incurring significant costs.
The Tax Implications
The relief is to be abolished with effect from 1 June 2024. Contracts exchanged on or before March 6, 2024, will retain the benefits of Multiple Dwellings Relief (MDR), while subsequent contracts will only qualify if completed before June 1st.
In the future, individual buyers of dwellings, including second homes, will no longer qualify for Multiple Dwelling Relief (MDR). It’s evident that MDR was never intended for such buyers, and the decision to abolish it may have been influenced by these individual transactions. The primary impact is expected to be felt by legitimate developers and investors. It will be interesting to see how the market reacts, and advisers should be prepared to assist with transactions rushed through to meet the June deadline.
Purchasers of six or more dwellings will still have the option to pay Stamp Duty Land Tax (SDLT) at non-residential rates, however, which have a maximum rate of 5%, preferable to the higher residential rates. Nevertheless, the overall tax revenue loss may still surpass current levels when MDR is applicable.
The removal of MDR is expected to alleviate administrative burdens for HMRC and is projected to generate additional revenue of £70 million in the current year, with an anticipated increase to £385 million by 2028/29.
These changes underscore a shift towards a more equitable and efficient property tax regime, while reshaping incentives for investors and landlords in the UK real estate market.
If any of the recent changes from the latest Budget announcements have left you unsure about how they affect you as a property owner, investor, or landlord, don’t hesitate to get in touch.
Our team is here to provide the relevant support and advice needed to navigate the intricate tax implications of these reforms. Whether you’re seeking clarification on the removal of tax reliefs, exploring alternative strategies, or planning for the future, we’re dedicated to helping you make informed decisions.
