Capital gains tax

Now you are entering the world of fantasy.

I am a realist, not a fantasist.

nanabird

The advice that has been given so far misses something very important which may apply to you. It is whether your holiday let qualifies for tax purposes as a Furnished Holiday Let (FHL). If it does, then you may be able to claim Business Asset Disposal Relief (BADR) which, unless you have made substantial other capital gains in your lifetime, will reduce the rate of capital gains tax payable to 10%. Compare this to the 18% charged on other residential capital gains for basic rate taxpayers and 24% for higher rate taxpayers.

As a FHL, the cost of furniture, white goods, fixtures and fittings would qualify for capital allowances. These reduce income tax rather than capital gains tax. Capital allowances are complex. You may have been entitled to claim up to 100% tax relief on your expenditure.

www.gov.uk/hmrc-internal-manuals/property-income-manual/pim4140

This is helpful too:

www.sykescottages.co.uk/letyourcottage/advice/article/income-tax-relief-for-holiday-lets#Capital%20Allowances%20(CA)

These are the conditions that must be satisfied to qualify as a FHL.

www.gov.uk/government/publications/furnished-holiday-lettings-hs253-self-assessment-helpsheet/hs253-furnished-holiday-lettings-2022

Whether this is a FHL depends on how long the property is available for letting each year, how long it is actually let for (and to whom) and the pattern of occupation i.e. short or longer lets.

That is the tax law as it stands at the moment.

However, be aware that in the Spring Budget, on 6 March 2024, the Government announced plans for a tax rise on owners of FHL; to abolish the beneficial tax treatment they currently receive - with a proposed start date of 6 April 2025.

The key driver of this policy was the number of properties which have and are being switched from long-term residential letting to holiday letting including Airbnb. This has significantly diminished the supply of housing for local people.

The Finance (No. 2) Bill 2023-24 received Royal Assent on 24 May 2024 but there was no provision in the Bill for the Budget announcement. It has been left to the next Government.

More on this from AccountingWeb:

www.accountingweb.co.uk/tax/hmrc-policy/uncertainty-clouds-future-of-abolished-furnished-holiday-lettings-regime

Having read this, you may wish to act sooner rather than later in case the new Government does proceed with the proposed Tory tax rise. I suspect they will do so to encourage more long term residential letting.

It is correct that the date of disposal for capital gains tax purposes is the date contracts are exchanged, however, you need to be aware that the draft legislation for the changes affecting FHL was expected to include an "anti-forestalling" rule to prevent the obtaining of a tax advantage through the use of unconditional contracts to obtain capital gains relief under the current FHL rules.

These examples from TaxWatch illustrate the different treatment of long term lets and FHL. Note these examples are for years up to 2022/23. The Government have reduced the annual exemption since then. It was £12,300 in 2021/22 and 2022/23; They more than halved it to £6,000 for 2023/24 and halved it again to £3,000 for 2024/25.

www.gov.uk/guidance/capital-gains-tax-rates-and-allowances

I mention this for balance. Much has been said here about what Labour might do in terms of tax increases so it's only fair to point out what the Tories have already done to increase the taxation of capital gains in general and the substantial increase in capital gains tax they were proposing for owners of FHL.

Nanabird. It’s unclear whether you bought the property in 2012 specifically as a holiday let or whether you bought and lived in it before then.

When you got married is also relevant. If at some point after marriage, you each owned a property capable of being used as a private residence, you had two years from the date of marriage, (or the date of the acquisition of the second property if that came later), to elect which was the principle private residence for capital gains tax purposes. Recall all the recent furore over Angela Rayner.

This isn’t the simple explanation you asked for as it isn’t a simple matter. I am wondering how you have been dealing with HMRC with regards to the letting income for the last twelve years. I would suggest you engage a tax accountant not only to deal with the capital gains aspect but to ensure that the income tax side has been dealt with properly.

Highly knowledgeable, informative, unbiased post Merion.

We have just sold our holiday home in France. We have employed an accountant to do the CGT calculation for us.

It is not that expensive and I did this about 20 years ago when I sold a flat i was letting out. She saved me considerably more money than she cost.

I don’t think anyone should try to do their own CGT calculations - it’s complex and an accountant will know what reliefs are available to reduce the amount payable. They will save you more than they cost, and you also have peace of mind that you have taken proper professional advice.

There are all sorts of ways that taxation could be changed but if the change results in the capital value of an asset falling it is self defeating. In addition that value is often held as security by a bank for borrowing, any changes need to be carefully measured.

Fully agree with you GSM, I think Labour will go for any money they regard as unearned, such as second homes, pensions, shares etc. am dreading them getting in!

I have lived through so many governments of so many hues, My judgement is that, when all is said and done, it is difficult to tell one from another.

i cannot see how any government of any hue can be worse than the current lot. Mind you I do not expect any change of government to be much better either.

But I do think all the voices of doom and prophesies of armageddon, which occur every time there is a change of government, are grossly overdone and those making them should just sit in a quiet place for a while and have a nice cup of tea.

I hope you are right Monica.

BevSec

Fully agree with you GSM, I think Labour will go for any money they regard as unearned, such as second homes, pensions, shares etc. am dreading them getting in!

We're currently buying a retirement apartment, initially as a rental property then as a future-proofing option for ourselves.
So a "second home" currently.
We also both have private pension funds, part of which is paying for the apartment.

These funds are savings from money we have both earned, over many many years, and saved hard rather than spent it all.

Not unearned at all, thank you Labour 🤨