The favourable tax regime for furnished holiday lettings is to come to an end on 5 April 2025. This will mean that landlords of furnished holiday lettings will lose access to a range of valuable capital gains tax reliefs, including gift hold-over relief.
Nature of the relief
Gift hold-over relief is a capital gains tax relief that may be available on gifts of business assets. Where the relief is claimed, the capital gains tax that would otherwise be payable on the gift is deferred until the recipient sells or otherwise disposes of the business asset. Effect is given to the relief by reducing the transferee’s base cost of the asset by the amount of the gain held over. The relief may also be available where an asset is sold for less than it is worth to help the buyer.
As regards business assets, to qualify, the person giving away the assets must be a sole trader or a partner in a business, or have at least 5% of the voting rights in a personal company. The assets given away must be used in the business or by the personal company.
The relief must be claimed jointly by the transferor and the transferee by completing a claim for hold-over relief form. The form must be submitted with their Self Assessment tax returns.
Application to furnished holiday lets
From an inheritance tax perspective, it can be beneficial to give away a property during the transferor’s lifetime. As long as they survive seven years from the date of the gift, there will be no inheritance tax to pay. However, in the absence of a relief, a capital gains tax charge may arise on the gift. The capital gains tax payable on a gift to a connected person is calculated on the market value of the asset. Consequently, without relief, there may be tax to pay but no proceeds from which to pay it. Claiming gift hold-over relief overcomes this, delaying the capital gains tax bill until the recipient sells the asset. This is useful if, say, a landlord wants to pass on their holiday let to a son or daughter.
However, time is running short to take advantage of this. From 6 April 2025, holiday lets will be treated in the same way as other residential lets, and will not be able to benefit from the relief. Consequently, the gift must be made on or before 5 April 2025 to access the relief.
Example
Betty has had a holiday let for many years. She is planning on retiring and wants to give her holiday let to her daughter, Lucy. Betty purchased the cottage in 2004 for £120,000. Its current market value is £380,000.
If Betty makes the gift before 6 April 2025 and Betty and Lucy claim gift hold-over relief, Betty will have no capital gains tax to pay on the gain of £260,000. The gain is held over. Lucy’s base cost is reduced by the amount of the held-over gain to £120,000 (£380,000 – £260,000). When Lucy sells the cottage, her gain will be worked out as if the cottage had cost her £120,000, rather than by reference to its market value when she acquired it.
If Betty does not make the gift until after 5 April 2025, she will not be able to claim gift hold-over relief and will pay capital gains tax on the gain of £260,000. If she is a higher rate taxpayer, the bill will be £62,400 (24% of £260,000), assuming she has already used her annual exempt amount. She will need to pay this within 60 days of completion.
