Upcoming changes to FHL
Although it may not have felt like it, currently, an FHL has many tax advantages.
Those tax advantages will be abolished on 5 April 2025 so that all residential property lettings will all be taxed as ‘long lets’.
The main changes are as follows:
- Mortgage interest relief can no longer be offset to save 40% tax. Instead, the relief will be capped at the basic income tax rate of 20%.
- On sale, any capital gain will be taxed between 18% and 24% and will no longer qualify for Business Asset Disposal Relief “BADR” (at the lower rates of 10% – 14%).
- Hold-over and rollover relief claims for capital gains tax will no longer be allowed.
- Capital allowances cannot be claimed in the future, although existing allowances will remain available. In future, the cost of purchasing a new item will not be tax deductible, but the cost of replacing an item will be.
- Profits from FHLs will no longer be considered relevant earnings for pension purposes.
- However, FHL income will still be treated as standard rated for output VAT.
- Presently, FHL profits can be allocated based on the owners involvement and not by the ownership proportion. From April 2025, profits will be allocated according to ownership proportion, which may lead to higher tax bills. For a jointly owned property, this means the profit will be assessed at 50:50 between the owners unless Form 17 is used, as noted below.
Form 17
- For a married/civil couple, joint owners can alter their half share of a property to another share by asking a solicitor to amend their respective beneficial interest in a property and ensure the property is held as ‘beneficial tenants in common’. For example, a property may be owned 10% beneficially by one spouse and 90% by the other (even though the legal title is 50:50). (Please note this is not recommended for unmarried/civil owners as capital gains tax may be payable on any transfer).
- HMRC will require evidence, in the form of a declaration of trust, to show that the couple’s beneficial interests in the net equity of the property reflect how the income is being distributed between them.
- A declaration of trust is a simple form of trust deed, which essentially states that although the legal title is owned by one or both parties, the beneficial interests (equating to the right to receive income) are held by the party wishing to declare the income on their tax return. Therefore, while the HM Land Registry might show the legal title to the property as being in joint names, the declaration of trust sits behind the legal title, providing evidence of how the actual benefit is apportioned and rental income paid between the couple. The legal owner or owners thus act as trustees for themselves as beneficiaries entitled to the equitable interest in the property in the specified shares.
- If spouses/civil partners who own property jointly want the rental income split between them in accordance with the beneficial ownership, they must make a formal election to HMRC on Form 17. Once made, the election cannot be revoked or changed unless the underlying beneficial interest changes. (If form 17 is not completed, the income continues to be split equally).
If FHL is operated by a non-owner
In this case, the operator of the FHL and the owner will have to have an agreement in place that allows the operator to run the FHL business. A commercial rent would have to be paid to the owners, or a salary would have to be paid to the letting operator.
Are you thinking of selling?
If you are considering selling, then any capital gain will be taxed at between 14% and 24%, depending on when you stopped receiving rental income on the property, your other income, and the date of sale. To secure the 14% rate, you should not receive ANY rental income after 5 April 2025 and must sell before 5 April 2026.
We will ensure that we deal with this change as tax-efficiently as possible, but if you wish to discuss this further, please do not hesitate to contact your usual Bevan Buckland adviser or send an email to mail@bevanbuckland.co.uk to find out more.
