If you own furnished holiday lets, you’re probably aware that the current tax regime offers some great advantages, especially when it comes to interest and finance costs. But with changes on the horizon from 5 April 2025, you may be considering whether setting up a property company could help you maintain those benefits.
Let’s break down what’s changing and whether using a property company for your furnished holiday lets could be the right move for you.
The End of the Favourable Tax Regime
Right now, one of the biggest perks of the furnished holiday lettings tax regime is the ability to deduct interest and finance costs in full when calculating your taxable profit. This can be especially beneficial if you pay tax at the higher or additional rates and have a mortgage on your holiday let properties.
But from 5 April 2025, this favourable tax treatment is ending. After this date, landlords with furnished holiday lets who aren’t incorporated will face the same interest relief restrictions as other residential landlords. This means interest and finance costs will no longer be deducted from profits; instead, relief will be capped at 20% of these costs, making it less tax-efficient for higher earners.
Why Consider a Property Company?
The key difference is that these interest rate restrictions don’t apply to companies. So, if you’re letting furnished holiday properties, incorporating your business could help you continue to deduct interest and finance costs in full. But it’s not all sunshine and rainbows – there are both pros and cons to this approach.
Let’s look at the details.
Incorporating an Existing Business
If you already have a furnished holiday letting business, transferring it into a company can bring some tax consequences:
- Stamp Duty Land Tax (SDLT): Transferring properties into a company means you’ll need to pay SDLT again on the property values.
- Capital Gains Tax (CGT): Moving your properties into a company is treated as a disposal for CGT purposes, and because the company is a connected person, this will be at market value. However, incorporation relief may be available, which can delay the CGT payment until you sell your shares in the company.
Starting Fresh with a Property Company
If you’re thinking of setting up a new property company rather than transferring existing properties, the company itself will buy the properties. In this case, Stamp Duty Land Tax will still be payable when purchasing the properties, but you won’t have the additional CGT complications.
Taxation of Rental Profits
One advantage of using a property company is that rental profits are taxed at corporation tax rates rather than personal income tax rates. Corporation tax is currently between 19% and 25%, depending on profits, which may be lower than the rate you’d pay as an individual landlord. However, bear in mind that companies don’t get a personal allowance, so tax is payable from the first pound of profit.
Another plus is that companies aren’t subject to the interest relief restriction, so you can continue to deduct interest and finance costs in full when working out your taxable profit.
Selling Property: CGT vs. Corporation Tax
If your company sells a property, any gain will be taxed at the corporation tax rates. On the other hand, as an individual landlord, you’d pay capital gains tax (CGT) at either 18% or 28% on property gains, and you could benefit from the £3,000 annual exempt amount (if you haven’t used it up). This exempt amount isn’t available to companies.
Plus, while individuals must report and pay CGT within 60 days of completing a sale, companies don’t have this separate reporting requirement – corporation tax is due nine months and one day after the year end.
Extracting the Profits
Here’s where things get tricky. While a company might pay less tax on rental profits than you would personally, if you want to use the profits outside the company, you’ll face additional tax charges. The tax implications will depend on how you extract the profits (e.g., dividends, salary) and your personal circumstances, which could reduce the attractiveness of the company setup.
Is It Right for You?
Deciding whether to incorporate your furnished holiday letting business depends on a range of factors – your income, your long-term plans for the properties, and how you want to access the profits. While using a property company may save you tax on interest and finance costs, the overall tax picture needs careful consideration.
If you’re unsure, the best approach is to seek professional advice. At Jon Davies Accountants, we can help you weigh up the pros and cons and decide on the right strategy for your business.
Need Advice?
Thinking about incorporating your furnished holiday let business? Get in touch with Jon and the team today – we’re here to help you understand your options and make the best decision for your circumstances.
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