Mind the Lifetime Limit When Claiming BADR on the Sale of Your Furnished Holiday Letting
Landlords of furnished holiday lettings (FHLs) are facing a time of uncertainty. With the 2024 Spring Budget announcement that the favourable tax regime for FHLs could be abolished from 6 April 2025, many are wondering what the future holds. Although the legislation is not yet in place, the possibility of losing these benefits has landlords considering whether to sell their FHLs before the deadline.
One of the significant advantages of owning an FHL is the ability to access Business Asset Disposal Relief (BADR), which can reduce the capital gains tax on your profits to just 10%, no matter your income level. However, with the potential end of the FHL regime looming, landlords might rush to sell their properties to lock in existing reliefs. But before you make a move, it’s important to be aware of the anti-forestalling provisions announced for contracts entered into on or after 6 March 2024.
What is Business Asset Disposal Relief (BADR)?
Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief) is a valuable tax relief that reduces the capital gains tax payable on the sale of qualifying business assets, provided the qualifying conditions have been met for at least two years before the business ceases or the asset is sold.
To qualify for BADR, the disposal must involve the whole or part of the business. If the business has already ceased, you have up to three years to sell the asset and still qualify for the relief. This gives landlords some flexibility—allowing them to stop letting the property as an FHL while it’s on the market, for example.
If you own only one FHL, selling it will mean the cessation of the business, and as long as the conditions are met, BADR should be available. However, if you own multiple FHLs, the situation becomes more complex. You can still claim BADR if you sell one property within your FHL business, but the relief applies only to the part of the business associated with that property.
How Much Relief Can You Get?
When BADR is available, capital gains tax is charged at just 10%, which can result in substantial savings. For instance, if you realise a gain of £200,000 on an FHL and you’re a higher rate taxpayer, your capital gains tax bill would be £20,000. Without BADR, the same gain on a residential property would result in a tax bill of £48,000 under the 2024/25 rates.
Beware of the Lifetime Limit
One crucial aspect to consider is the lifetime limit on BADR, which is capped at £1 million. This limit applies to the total gains on which you can claim the relief throughout your lifetime. Once you’ve claimed BADR on gains totalling £1 million, any further gains will be taxed at the normal capital gains tax rates.
Before deciding to sell one or more FHLs to benefit from the 10% tax rate, landlords should carefully consider their available lifetime limit. Any previous gains on which BADR has been claimed must be factored in, as the limit applies to you as an individual, not just to specific types of gains.
Should You Sell Your FHL?
If you’re contemplating selling your FHL to take advantage of BADR before the possible changes in April 2025, it’s crucial to assess your situation thoroughly. Understanding your lifetime limit and how it applies to your overall financial picture is essential.
If you need help navigating these complex rules and deciding the best course of action for your property portfolio, our team at Jon Davies Accountants is here to support you.
Contact us today to ensure you’re making informed decisions and maximising your tax savings.
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