The draft legislation issued on 29 July 2024 also impacts on those operating a FHL business via a company.
From 1 April 2025, the FHL income will be taxed alongside any other UK property income in the corporation tax computation. For companies with accounting periods straddling 1 April 2025, the accounting period will need to be apportioned between two separate accounting periods.
Capital allowances
Capital allowances will no longer be available for capital expenditure on furniture or fixtures incurred from 1 April 2025. Companies will simply be entitled to corporation tax relief on property repair costs as a profit and loss account deduction (e.g. replacing a kitchen) and the costs incurred in replacing domestic items (e.g. replacement sofas), not on any initial outlay.
Initial expenditure on any fixtures as well as any other capital improvements will be relieved on a future sale when calculating any corporation tax liability on a capital disposal.
Company FHL owners with existing capital allowance pools can continue to claim writing down allowances on those pools (against their property income) and there will be no deemed disposal or balancing charges as a result of these changes.
Finance costs
Unlike individuals, companies will not be subject to the mortgage interest restriction following the abolition. Where an FHL is held in a company, full relief will normally be available for the mortgage interest, and this will continue going forward under the planned proposals.
CGT reliefs
In terms of capital gains tax (CGT) reliefs, currently, the company itself cannot claim gift relief and business asset disposal relief (BADR) but the individuals with shares in a company can where the necessary conditions are met.
Following the proposed abolition of the special FHL regime, the shares will no longer qualify for these reliefs and the company itself will be unable to claim rollover relief on any FHL reinvestment from 1 April 2025. Nor will substantial shareholding exemption (SSE) be available in future where shares in a subsidiary are sold on or after 1 April 2025.
Losses
The government have confirmed that FHL losses will be available to be carried forward and treated as though made in the property business.
Should you incorporate it?
Companies operating FHLs are going to be affected by the changes next April. That source of income will lose its advantages both inside the company and outside.
You cannot escape them either way. However, the question about whether to incorporate an FHL business will come down to whether the transaction charges (LBTT, ADS, legal fees) together with ongoing higher costs for tax and accounting support, can be justified by the tax savings on borrowings. That is of course assuming that you can get your lender to novate the loan in favour of the company.
