Residential property investment

Property income

In recent years it has become increasingly apparent that property investment has become more expensive in terms of the associated tax charges. It is more expensive to acquire a second or subsequent residential property due to the 5% SDLT surcharge. If you rent that property and have a mortgage on it, you will only receive tax relief at a maximum of 20% as a tax reducer. For these reasons, it is important to maximise any available reliefs as far as possible.

Thought should be given to tax efficient ownership of property. For spouses or civil partners, they are taxed 50:50 on jointly held property unless it is held in unequal proportions and often an election is required for this to be effective for tax purposes.

Moving the income and potentially any future capital gains to other family members may also be worth considering, particularly if they are basic rate taxpayers. For example, if you have a rental property and children at university, it is possible to gift them a small amount of capital (say 5%) and elect for a larger share of income, say, 95% to be paid on that capital shares. There are steps to take to formalise this arrangement and it is unlikely to be possible where the property is subject to a mortgage. However, it can be a good way to divert income to where it is needed. In this scenario, the income would go to the university student and is likely to fall within their personal allowance and be tax free. This will give a better result than where the income arises on the parent, who may pay tax at 20%, 40% or event 45% before gifting the income to the child to pay for university costs.

A similar arrangement can be put in place between spouses or civil partners. In these cases, the income split must follow the capital share, but that capital share can be anything the owners decide, providing the process to formalise this decision is properly followed.

Furnished holiday lets

Properties qualifying as furnished holiday lets (FHL) currently enable owners to enjoy special tax rules which allow them to lock into reliefs and allowances similar to that of a trade. From 6 April 2025 the special tax rules for FHLs are to be abolished and the properties will be taxed as residential properties going forward.

A furnished holiday let is largely what is says on the tin, a furnished property let out for short term holiday lets. Broadly speaking, to qualify as such, the property needs to be available for commercial letting to the public for at least 210 days of the tax year and actually let for 105 days. This relief is aimed at short term lettings therefore it will not apply if the longer term lets (exceeding continuous 31 days) total more than 155 days in the tax year.

The key benefits that will be removed include:

• Exemption from interest restriction rules (which restrict loan interest to a basic rate tax reducer for income tax purposes)
• Capital allowances claimed on capital expenditure on fixtures and furniture
• Access to capital gains tax (CGT) reliefs such as business asset disposal relief (10% rate of CGT), gift holdover relief and rollover relief
• Ability for spouses/civil partners to share FHL profits as they wish
• Inclusion as net relevant earnings for pension purposes

There are some special transitional rules which apply on the change in rules:

• Capital allowances – there will be no automatic clawback due to the change in rules, and any unused capital allowance pools can be claimed against your property letting income going forward.
• Losses – the transitional rules allow FHL losses to be used flexibly going forward against property profits (either UK or overseas).
• Anti-forestalling rules – preventing a tax advantage through use of unconditional contracts to obtain relief by selling to a connected party, for example.

What options are open to FHL property owners?

• For spouses/civil partners, consider the ownership of property and how it will be taxed going forward. For many they will be taxed 50:50 on jointly held property from 6 April 2025 unless action is taken to change the ownership. Formalities may be required for this to be effective and will require input from your solicitor. Care should be taken where there is a mortgage on the property
• Consider whether gifting the FHL property may be sensible as part of your succession planning. It currently may be possible to holdover the gain so that no capital gain arises. This only applies to 5 April 2025. There may be circumstances where the gain may not be held-over in full (e.g. property has not always qualified as a FHL) or where there is a mortgage over the property. Alternatively, CGT could be paid on the gift (potentially at 10% of the gain) in order for the recipient to take on the property at its current market value
• Consider whether all capital allowances available have been claimed on the property. Allowances can only be claimed if using the accruals method of accounting and where expenditure is incurred by 5 April 2025. Allowances can be claimed on furniture in the property as well as fixtures (e.g. bathrooms, heating, water systems, lighting, bathroom sanitaryware, etc)
• For those looking to sell their FHL property, it may be possible to lock into a 10% rate of tax if the whole or separable part of the FHL business has been sold by 5 April 2025
• For those selling FHL property after 5 April 2025, business asset disposal relief (BADR) will only be available where the FHL business has ceased by 5 April 2025. The date of cessation is the date from which there are no longer any bookings or lettings nor any intention to resume such activity in future. The rate of tax under BADR is also due to rise to 14% for 2025/26 tax year and 18% for 2026/27 tax year
• Incorporation is a route some FHL owners have considered, but the change in structure can be expensive to achieve and may not be tax efficient overall, particularly if you live off the income or have a fair amount of private use. Bespoke advice should be taken if this option is being contemplated
• Carry on the FHL business as you are, but be aware of the new rules from April 2025. The change in rules are likely to have far less impact on those established FHL businesses with little or no borrowing.

Some of the planning points above need to be implemented by 5 April 2025 to be effective. Where input from a solicitor is also required, this needs advance thought.