Currently, if you’re renting out fully furnished vacation properties as an individual, you’re benefiting from some significant tax advantages. One of the key perks is the ability to deduct all your interest and finance costs when calculating your taxable profit. This means that if you have a mortgage on your vacation property, you can substantially reduce your tax bill, particularly if you’re a higher or additional rate taxpayer. However, there’s a catch: this favourable tax treatment is scheduled to come to an end on April 5, 2025. After this date, individual landlords will be subject to the same interest rate restrictions that apply to regular residential rentals. In simpler terms, you’ll only be able to claim tax relief on 20% of your interest and finance costs, regardless of your tax bracket. For many, this could lead to a significant increase in their tax liability.

Enter the Property Company Option

Given these upcoming changes, some landlords are considering setting up a company to own and manage their holiday lettings. Why? Because companies aren’t subject to these new interest rate restrictions. They can still deduct all of their interest and finance costs when calculating their taxable profits.

Sounds great, right? Well, as with most things in the world of taxes, it’s not quite that simple. There are both advantages and disadvantages to consider.

Incorporating an Existing Business

If you already have a furnished holiday lettings business and you’re thinking about turning it into a company, here are a few things to keep in mind:

Stamp Duty Land Tax: You’ll likely have to pay this tax again when you transfer your properties into the company. This could be a significant cost.

Capital Gains Tax: Transferring your properties to a company counts as a disposal for capital gains tax purposes. The good news is that you might be eligible for something called “incorporation relief,” which could delay when you have to pay this tax until you sell the shares in your new company.

Starting Fresh with a Property Company

If you’re new to the holiday lettings game and considering starting with a company structure, things look a bit different:

1. The company will purchase the properties directly, so you won’t have to transfer existing properties.
2. However, Stamp Duty Land Tax will still be payable on these purchases.

How Profits Are Taxed

When a company lets out furnished holiday accommodation, the profits are subject to corporation tax instead of income tax. The rates range from 19% to 25%, depending on the amount of profit. This could be lower than what you’d pay as an individual, especially if you’re a higher-rate taxpayer.

However, companies don’t have a tax-free personal allowance like individuals do. This means they pay tax on every pound of profit, starting from the first pound.

Remember those interest and finance costs we talked about earlier? Companies can still deduct these in full when calculating their taxable profit, which is a big plus. When selling a property, companies pay corporation tax on the gains, while individuals pay capital gains tax (which can be up to 28% for residential property). Individuals also benefit from an annual tax-free allowance for capital gains, which companies don’t get.

One other thing to note: individuals need to report and pay any capital gains tax on residential property sales within 60 days. Companies have until their usual corporation tax deadline, which is typically nine months and one day after the end of their accounting period.

Getting Money Out of the Company

While a company might pay less tax on rental profits, there’s a catch. If you, as the director or shareholder, want to use that money for personal expenses, you’ll need to extract it from the company. This could lead to additional tax charges, potentially reducing the appeal of the company structure.

How much tax you’ll pay on money you take out of the company depends on how you do it (salary, dividends, etc.) and your personal tax situation.

So, What’s the Right Move?

As you can see, there’s no one-size-fits-all answer. The decision to set up a property company for your furnished holiday lets depends on various factors:

1. Your current tax situation
2. The number and value of properties you own or plan to buy
3. Your long-term plans for the business
4. How much of the profit you need for personal use
5. The costs involved in setting up and running a company

For some landlords, the ability to fully deduct interest and finance costs through a company structure could lead to significant tax savings. This could outweigh the additional complexities and costs of running a company.

For others, especially those with smaller portfolios or those who need most of the rental income for personal use, the simplicity of individual ownership might still be preferable, even with the upcoming tax changes.

It’s also worth considering that tax laws can change. While using a company structure may seem advantageous now, future changes could alter the landscape again.

Keep in mind that although tax considerations are important, they should not be the sole factor influencing your decision. It’s essential to also consider the practical aspects of managing your holiday rentals through a company rather than as an individual and to align this with your overall business goals and lifestyle.

The upcoming changes in the tax treatment of furnished holiday lets are causing many landlords to rethink their business structure. While creating a property company may offer tax advantages, it’s a complex decision. By weighing the pros and cons and seeking professional advice, you can make an informed choice that best suits your circumstances and goals.