The holiday let regime is being replaced on April 5 2025, as the UK government looks to put landlords who operate short-term rentals like Airbnbs on the same playing field as the long-term equivalent.
The new rules will mean that mortgage interest will no longer be fully deductible when calculating taxable profits from a rental property.
In addition various capital gains tax reliefs will no longer be available, including business asset disposal relief, business assets rollover relief, and gifts holdover relief – while profits from holiday lets will no longer count as ‘earnings’ for pension contribution purposes.
The new rules will also mean that owners will no longer be able to claim tax relief on the original cost of domestic items purchased for use in the property.
In order to prepare for the new regime, Handelsbanken Wealth & Asset Management urged holiday let landlords to make a number of changes.
One change recommeded by Handelsbanken could mitigate a new rule, that will mean holiday lets owned jointly by spouses or civil partners will be liable for tax on 50% of the rental profits. This could have significant consequences for anyone whose income is close to the threshold of a higher income tax bracket, increasing their personal income tax burden.
To avoid this automatic ‘50:50’ taxation, spouses/civil partners could alter the beneficial ownership of their property to unequal shares. To make this happen they would need to submit a formal application to HMRC to change the split of income from the property for tax purposes.
Another measure that can be taken is maximising tax relief by topping up pensions during this tax year. If short-term holiday lets provide the only source of earnings, landlords could maximise their personal pension contributions this tax year and therefore be eligible to bring forward extra tax relief from the previous three tax years.
Holiday let landlords could also gift their property to a family member before the current tax year, in order to claim capital gains tax ‘gifts holdover relief’.
However, the amount of gain that may be ‘held over’ may need to be time-apportioned if the property has not qualified as a short-term holiday let. There may also be stamp duty issues to consider. If landlords occupy the property personally then they must pay an open market rent to ensure the gift is effective for inheritance tax purposes.
Lastly, for those who want to exit the market, you could sell up this tax year to secure business asset disposal relief at the current 10% capital gains tax rate.
Mark Collins, head of tax at Handelsbanken Wealth & Asset Management, said: “With holiday season around the corner and a significant shift in the tax regime on the horizon, it should come as little surprise that we’ve seen a significant uptick in advice requested by customers thinking about selling their current holiday let property, or halting the buying process altogether.
“With the planned changes all designed to bring tax rules for holiday lets into line with tax rules for other residential property lettings, it is crucial for current or potential owners to understand what this means for them.”