Holiday Let Capital Gains Tax Relief

Capital Gains Tax (CGT) is a tax that is taken from the profit that you make when you sell an asset for a higher amount than you initially bought it for. Assets that you may be charged Capital Gains Tax on may include valuable personal possessions, business assets and property.

When you are considering selling a property, Capital Gains Tax is something that you must account for. However, a furnished holiday let (FHL) is classed as a business asset and will therefore potentially qualify for three types of Capital Gains Tax reliefs.

Please note that all three of these Capital Gains Tax Relief schemes will be withdrawn as part of the new legislation which abolishing the Furnished Holiday Let tax regime as of April 2025.

Autumn 2024 Budget Announcement

Despite anticipation that Capital Gains Tax may increase as part of the Budget announcement on October 31st 2024, rates will remain at 18% for lower rate payers and 24% for higher rate payers.

There was also no further update on the abolition of the FHL tax regime, which means that the withdrawal of the three types of relief discussed below are still going to be withdrawn under the new legislation, from April 2025.

Business Asset Rollover Relief (BARR)

Properties that qualify as furnished holiday lets may also benefit from Business Asset Rollover Relief (BARR), under section 152 of the Taxation of Chargeable Gains Act 1992.

What is Business Asset Rollover Relief?

Business Asset Rollover Relief, or, BARR, is available where the proceeds of one business asset (a furnished holiday let), in full, or in part, are reinvested in another business asset. In these circumstances, the gain on the disposal of the first asset can be rolled over until the replacement business asset is sold.

As a result, you delay paying Capital Gains Tax if you sell or use all or part of your proceeds to buy a new business asset. You may then need to pay tax on the gain from the original asset.

In July 2024, the new draft legislation was published. This announced that Business Asset Rollover Relief will be withdrawn from April 2025.

With Business Asset Rollover Relief, you can also claim:

• Provisional relief, allowing relief if you have plans to invest your gains but have not done so yet

• Relief if you use your gains to improve existing assets e.g. refurbish a holiday let

How do you qualify for Business Asset Rollover Relief?

• Your new asset must be bought within three years of selling your original asset

• Your business must continue trading during the process of selling your original asset and purchasing your new asset

• Both the original and new assets must be used within your business

In some circumstances, you can also claim partial relief. These include:

• If you have only used some of the profit earned from selling your asset to reinvest

• If your asset wasn’t fully used in your business

• The proceeds made from selling your asset were used to purchase assets that are depreciating in value. This can include fixed plant and machinery, as well as any assets that are expected to last less than 60 years)

What assets can you claim Business Asset Rollover Relief on?

• Land and buildings

• Fixed plant and machinery (E.g. embedded fixtures of a building such as kitchens, bathrooms heating and electrical systems)

How do I claim Business Asset Rollover Relief?

To claim your BARR, you must complete the form found within the HS290 Business asset rollover relief HMRC help sheet and submit it along with your self assessment tax return.

You must claim your Business Asset Rollover Relief within four years of the end of the tax year that you purchased your new asset, or from when you sold the original asset if this occurred after.

For example, if you sold/disposed of an asset in July 2021, and purchased your replacement asset in November 2021, you would need to claim your BARR by April 5th 2027.

Transitional rules regarding the withdrawal of Business Asset Rollover Relief

• Rollover Relief can still be claimed if the proceeds are reinvested in a qualifying asset within three years of the date the property was sold

  • Furnished Holiday Lets will no longer classify as a qualifying asset beyond April 2025

Business Asset Disposal Relief (BADR) (Previously Entrepreneurs’ Relief)

When you sell or ‘dispose of’ all or part of your business, you may be able to pay less Capital Gains Tax.

Gains on the sale of a buy-to-let residential property will ordinarily be subject to Capital Gains Tax at rates of 18% (basic rate taxpayers) or 24% (higher rate taxpayers).

However, furnished holiday lets are treated as business assets, and therefore have the potential to qualify for Business Asset Disposal Relief.

What is Business Asset Disposal Relief?

Previously known as Entrepreneurs Relief, Business Asset Disposal Relief (BADR) is a tax relief scheme which reduces the rate of Capital Gains Tax.

Currently, you’ll pay 10% on all gains on qualifying assets under the Business Asset Disposal Relief scheme. However, new legislation announced in July 2024 has confirmed that BADR will be withdrawn from April 2025.

How can I qualify for Business Asset Disposal Relief?

To qualify for Business Asset Disposal Relief, both of the following must apply for at least 2 years up to the date that you sell your business:

• You are a business partner or sole trader

• The business has been in your ownership for at least 2 years

You can qualify for BADR when:

• A sole trader or business partner disposes of all or part of their business (or assets lent to the business)

or

• A director or employee disposes of shares in a personal company (or assets lent to the company)

The same conditions also apply if you’re closing your business. You must also dispose of your business assets within 3 years to qualify for relief. If the company stops being a trading company, you can still qualify for relief if you sell your shares within 3 years.

You can work out how much you could save through Business Asset Disposal Relief here.

Transitional rules regarding the withdrawal of BADR

• The three-year period to dispose of assets following the cessation of a business will still be applicable

There are some circumstances to be aware of during the transition:

• Your business must cease before the rules change for BADR to still be available to you (subject to meeting all qualifying conditions)

• BADR can still be claimed if your business within the 2024-25 tax year and the property is sold within three years of the date of cessation

• If you're selling a furnished holiday let, but you have a second holiday let that you are continuing to operate, the 10% Business Asset Disposal Relief is not applicable

• The BADR increase to 14% in April 2025, and then to 18% from 6th April 2026 will not impact FHL owners. Providing you cease your business within the 2024-25 tax year and sell the property within three years, the 10% rate will still apply

Gift Hold-Over Relief

Gift Hold-Over Relief may be available to furnished holiday let owners if you give away your holiday home, or sell it for less than it’s worth to help the buyer.

What is Gift Hold-Over Relief?

Gifts are often treated as deemed disposals at market value for the purposes of Capital Gains Tax, meaning that the gift of a normal buy-to-let property by an individual could trigger a significant CGT liability in the hands of the person transferring.

However, a furnished holiday let as a business asset can benefit from Business Asset Hold-Over Relief, under section 165 of the Taxation of Chargeable Gains Act 1992. Instead of stamping the Capital Gains Tax liability at the date of the gift, the capital gain can be held over until the recipient of the gift disposes of the property.

Any claim for Gift Hold-Over Relief must be made by both the person transferring and the person receiving the transfer, except in the case of trusts.

With Gift Hold-Over Relief, you won’t need to pay CGT when giving the assets away. This means that the person who receives the assets must pay any CGT that is due when they sell them on.

Please note: As part of the new legislation, Gift Hold-Over Relief will no longer be available for furnished holiday lets from April 2025.

Why is Gift Hold-Over Relief Useful?

Furnished holiday let businesses are unlikely to qualify for Business Property Relief, for Inheritance Tax purposes. As a result of this, Gift Hold-Over Relief is a useful planning tool which allows individuals to pass value down the generations in a tax-efficient manner.

Disclaimer

The information above is shared with you by Zeal. Sykes can’t advise you on, and isn’t responsible for, tax matters in relation to your holiday let, but it hopes that by pointing you in the direction of an expert in the field, it’s starting you off on the right foot, and you can read into this matter further and seek your own advice from Zeal, or your chosen advisor, as and when you feel it’s needed.

MATT JEFFERY, TAX PARTNER, ZEAL TAX

The CGT advantages of holiday letting can save owners thousands in tax on sale of their property.  It is, however, important to ensure the property meets the Furnished Holiday Let criteria in the year of sale to obtain the lower tax rate or deferral reliefs.