The current tax regime for furnished holiday lettings has a number of advantages, including the ability to deduct interest and finance costs in full when calculating the taxable profit. This enables the landlord to secure tax relief for interest and finance costs at their marginal rate of tax, something that is advantageous where the landlord pays tax at the higher or additional rates and has a mortgage on properties which are let as furnished holiday lets.
However, the favourable tax regime for furnished holiday lets is to come to an end on 5 April 2025. After that date, unincorporated landlords letting furnished holiday accommodation will be subject to the interest rate restrictions that apply to unincorporated landlords letting residential accommodation outside the furnished holiday lettings regime. This means that relief for interest and finance costs will be given as a tax reduction rather than being deducted in calculating the taxable profits of the property business. The reduction will be capped at 20% of the interest and finance costs.
Using a property company
The interest rate restriction does not apply to corporate landlords, and landlords with furnished holiday lettings may consider incorporating their business when the furnished holiday lettings regime comes to an end. However, while this will enable interest and finance costs to be deducted in full, there are disadvantages as well as advantages.
Incorporating an existing business
Where the landlord already has a furnished holiday lettings business, incorporating that business will have a number of tax consequences.
1. Stamp duty land tax may will be payable again when properties are transferred into the company.
2. There will be a disposal for capital gains tax purposes and, as the company will be a connected person, this will be at market value. However, incorporation relief may be available which will delay the point at which the capital gains tax is payable until the shares in the new company are sold.
Setting up a new property company
If a landlord wishes to start letting holiday accommodation, they may wish to do so through a company. Rather than transferring properties owned by the landlord into the company, the company will purchase the properties. Stamp duty land tax will be payable on the purchase.
Taxation of rental profits
Where furnished holiday accommodation is let by a company, the profits will be charged to corporation tax rather than income tax. The rate payable will depend on the profits and will range from 19% to 25%. Thus, the rate paid by the company may well be lower than the rate that the landlord would pay personally. However, unlike an individual, a company does not have a personal allowance so tax is payable from the first pound of profit.
As noted above, the interest relief restriction does not apply to companies, so any interest and finance costs can be deducted in full in calculating the taxable profit.
If a property is sold, any gain will be taxed at the corporation tax rates. By contrast, an unincorporated landlord would pay capital gains tax at either 18% or 24% on residential property gains and would benefit from the £3,000 annual exempt amount if not already used up – something not available to companies. Individuals must report residential gains within 60 days of completion and pay any capital gains tax due within the same window. For companies, there is no separate reporting and the corporation tax on the gain is payable by the normal corporation tax due date, nine months and one day after the year end.
Extracting the profits
Although a company may pay less tax on rental profits than an unincorporated landlord, if the director/shareholder wishes to use the profits outside the company for personal use, these need to be extracted and this may incur further tax charges, reducing the attractiveness of the company set-up. The tax implications will depend on how the profits are extracted and the director’s personal circumstances.
