Did you know that the UK government is changing how holiday rental properties will be taxed, starting from April 2025? As specialist property accountants, we at Williamson & Croft have been tracking these incoming changes.
The key headline is this: while VAT on furnished holiday lets remains unchanged, there are 6 major changes to income tax and capital gains tax that property owners need to understand.
As these rules come into force from April, it’s important to get a handle on the changes to stay compliant. We’ve broken these 6 changes down into simple, actionable steps.
1. A reduction in mortgage interest relief
Owners will get much less tax relief on their mortgage payments, meaning they’ll have to pay more tax overall.
Under the current system: If you’re a higher-rate (i.e. paying 40% tax rate) or additional-rate taxpayer (i.e. paying 45% tax rate), you can currently reduce your tax bill by the full amount of mortgage interest you pay on your holiday let.
After April 2025: Everyone will only get back 20% of their mortgage interest payments, regardless of their tax rate. This means higher-rate taxpayers will pay a lot more tax than before for their furnished holiday lets.
2. Higher tax rates when selling your holiday let
You’ll have to pay more tax when you sell your holiday let property and there will be fewer ways to reduce this tax bill.
Under the current system: Holiday let owners can currently pay as little as 10% tax on the profit when they sell their property (under Business Asset Disposal Relief). They can also delay paying tax by reinvesting the money in other business assets.
After April 2025: The tax rate will rise to 24% on all profits from holiday let sales, and owners won’t be able to delay the tax by reinvesting anymore. This applies no matter how long you’ve run your holiday let as a business. The government has also put rules in place to stop people trying to avoid these new changes through clever accounting.
3. Limited tax relief on property improvements
You won’t get as much tax relief when improving your property – it will only apply when replacing things that break or wear out.
Under the current system: Owners can claim tax relief on many types of property improvements and new furnishings, which helps reduce their tax bill when they invest in the property.
After April 2025: You’ll only get tax relief when you replace existing items that wear out or break. While you can continue claiming tax relief on improvements made before April 2025, new improvements won’t qualify for the same tax benefits.
4. Changes to pension contribution calculations
The money you make from your holiday let won’t help you put more into your pension anymore.
Under the current system: The money you make from holiday lets counts towards how much you can pay into your pension and get tax relief on.
After April 2025: Holiday let income won’t count towards your pension contribution allowance anymore. This might limit how much you can put into your pension and could affect your National Insurance contributions too.
5. New rules for splitting income between owners
Under these new changes, married couples will need to fill in special paperwork if they want to split their holiday let income in a way that’s not 50/50.
Under the current system: Married couples can divide the rental income between them however they like without any paperwork.
After April 2025: Married couples will need to fill in a special form (called Form 17) if they want to split the income unequally. This form must reach HMRC within 60 days of signing, or the income will be split 50/50 by default. Non-married owners can still split the income however they choose.
6. Removal of special tax benefits for companies
Companies that own holiday lets will lose their current tax advantages and face new, stricter rules.
Under the current system: Companies that own holiday lets benefit from special tax treatment called the Substantial Shareholdings Exemption (SSE). This currently means they might not have to pay any tax when selling subsidiaries that own holiday lets
After April 2025: Companies won’t be able to use the SSE anymore when selling holiday let businesses, meaning they’ll have to pay the full tax rate on any profits from these sales.
The government has put measures in place to prevent any attempts to work around these new rules, particularly for sales arranged before April 2025 but completed after.
Get property tax assistance from the experts
With a vast amount of incoming changes set to hit those owning furnished holiday lets in April of this coming year, you may want support to ensure you’re getting the best from your tax structuring while maintaining compliance.
With years of experience assisting property owners of all sizes in their tax affairs, Williamson & Croft can provide guidance.
Whether you’re a national block management company or just have a single furnished holiday home you let, we can help you start the new year with a robust tax planning strategy for 2025.Book a call with someone from the team of expert accountants at Williamson & Croft to talk through your property accounting needs today.