The current tax regime for furnished holiday lettings (FHL) offers several advantages, particularly when it comes to deducting interest and finance costs in full when calculating taxable profit. This is especially beneficial for landlords paying higher or additional rates of tax who have mortgages on properties that qualify as FHLs.
However, the favourable tax treatment for furnished holiday lets is set to change after 5 April 2025. From this date, unincorporated landlords who let furnished holiday accommodation will be subject to the same interest rate restrictions that apply to other unincorporated residential landlords. Under the new rules, relief for interest and finance costs will be provided as a tax reduction rather than being deducted from taxable profits. This reduction will be capped at 20% of the interest and finance costs.
Using a Property Company
Unlike unincorporated landlords, corporate landlords are not subject to these interest relief restrictions. For this reason, some landlords may consider incorporating their furnished holiday letting business once the current regime ends. While operating through a company allows interest and finance costs to be fully deducted, there are other factors to consider, both advantages and disadvantages.
Incorporating an Existing Business
For landlords with an existing furnished holiday lettings business, incorporating the business will come with several tax consequences, including:
- Stamp Duty Land Tax (SDLT): SDLT will become payable again when transferring properties into the company.
- Capital Gains Tax (CGT): Transferring properties into a company is classed as a disposal for CGT purposes, with the disposal assessed at market value, as the company is a connected person. In some cases, incorporation relief may be available, delaying the point at which CGT becomes payable until the shares in the new company are sold.
Setting Up a New Property Company
For landlords considering entering the holiday accommodation market, setting up a new property company may be an option. In this scenario, rather than transferring personally owned properties into the company, the company itself would purchase the properties. It’s important to note that Stamp Duty Land Tax will be payable on any property purchases made by the company.
Taxation of Rental Profits
Where furnished holiday accommodation is let through a company, the rental profits are subject to corporation tax rather than income tax. The corporation tax rate ranges from 19% to 25%, depending on the level of profits, which may be lower than the personal income tax rates paid by individual landlords. However, unlike individuals, companies are not entitled to a personal allowance, meaning tax is payable from the first pound of profit.
Another advantage of operating through a company is that the interest relief restriction does not apply. This means that any interest and finance costs can be deducted in full when calculating the company’s taxable profits.
Capital Gains Tax and Sale of Property
When a property is sold by a company, any gain is subject to corporation tax. By comparison, an unincorporated landlord would pay capital gains tax (CGT) at either 18% or 28% (depending on their income level) on residential property gains, with the potential benefit of the £3,000 annual exempt amount. This exemption is not available to companies. Additionally, individuals must report residential gains within 60 days of completion and pay any CGT within the same period. Companies, on the other hand, pay corporation tax on gains by the usual due date, which is nine months and one day after the end of the accounting period.
Extracting Profits from the Company
Although a company may pay less tax on rental profits than an individual landlord, using these profits personally can attract further tax charges when extracting them from the company. The method of extraction—whether by salary, dividends, or a director’s loan, will affect the additional tax liabilities, depending on the director’s personal tax circumstances. Therefore, it is important to weigh up the overall tax implications of profit extraction when deciding whether to incorporate.
Get Tax Advice
While the tax regime for furnished holiday lets will change after April 2025, incorporating a property business offers some advantages, particularly in terms of interest relief and corporate tax rates. However, landlords should carefully consider the full range of tax implications, including Stamp Duty Land Tax, capital gains, and the potential tax on extracting profits from the company.
For those considering incorporation, it is advisable to seek professional advice tailored to individual circumstances to ensure the best course of action is taken. Contact our team for expert advice on property tax planning and incorporation.
