After the Budget: It’s getting harder to invest in property

By Andrew Hoskin, Partner, Moore Thompson

The Chancellor’s Spring Budget is another step in the ongoing march to raise more tax from property – a trend we have seen in previous budgets with measures such as increases in Stamp Duty Land Tax, the introduction of a higher rate of Capital Gains Tax (CGT) on residential property compared with other assets and restricting the tax relief on mortgage interest on rental properties.

The recent Budget does provide a small element of relief through the reduction in the rate of CGT on residential properties from 28 per cent to 24 per cent from 6 April 2024.

However, there has been no matching reduction in the CGT rate for basic rate taxpayers on the sale of residential properties, which remains at 18 per cent.

The budget also presents two new strands of offence against property investment:

  • The abolition of the Furnished Holiday Let Scheme from April 2025
  • The abolition of multiple dwellings relief for Stamp Duty Land Tax

Furnished Holiday Let Scheme – a myriad of losses

When the FHL Scheme is abolished, property owners and investors will likely see significant losses in terms of favourable tax arrangements and cost mitigation.

The current Furnished Holiday Let Scheme will be with us until April 2025. Under this:

Capital Allowances can be claimed on assets used in your holiday let business, which is an option not available for long term lets. This can apply to furniture, furnishings and equipment, as well as certain refurbishment costs like plumbing and wiring. So this gives a window of opportunity to make this expenditure before the regime changes.
Pension contributions – income generated from FHL property is classed as ‘relevant earnings’ which means you can make tax advantaged pension contributions.

Capital Gains Tax Reliefs can be available in the right circumstances, for example Business Asset Disposal Relief, Business Asset Rollover Relief and Gift Holdover Relief. This can be particularly useful if you are planning to pass an FHL within the family.

Splitting the profits between joint owners – profits can be flexibly split between the legal owners, which is not the case for long-term rental properties.

If currently the income is allocated mostly to a co-owner who has a lower income (on the basis that they are mostly responsible for the operation of the FHL), from April 2025 the income will be split equally between the legal owners unless the beneficial ownership is split differently via a Deed of Trust.

There are some major decisions to be made before April 2025.

For taxpayers affected by these changes, many may be pushed to sell their furnished holiday let properties and come out of the sector between 6 April 2024 and 5 April 2025, before the regime changes, and taking advantage of the lower Capital Gains Tax rates applying for higher rate taxpayers at that point.

Long term, however there is no doubt that these changes will reduce the attractiveness of an FHL as an investment – the most recent in a long line of measures making it more difficult to invest in property.