The furnished holiday lettings (FHL) tax regime is set to be scrapped from 6 April 2025, with draft legislation already on the table, which means many of the tax incentives associated with this type of rental will no longer be available.
If you own a holiday home, now is the time to get familiar with these forthcoming changes and to consider how they might impact your tax liabilities.
Current tax benefits
Individuals owning FHLs currently enjoy several tax benefits, many of which will be lost once the regime is abolished. These include:
Capital Gains Tax (CGT) – FHL owners may qualify for Business Asset Disposal Relief (BADR), which offers a lower tax rate (10%) compared to standard CGT if their FHL activities are deemed a business.
Mortgage interest – Expenses like mortgage interest can be fully deducted from rental income, reducing taxable profits for FHLs significantly more than for non-FHL properties.
Capital Allowances – FHL owners can, as it stands, deduct costs associated with a wide range of expenditure – such as furniture, fixtures and fittings – from their taxable profits, thus reducing their tax liability. The first £1 million of capital expenditure can be claimed under the Annual Investment Allowance (AIA).
Pension contributions – income from FHLs currently counts as ‘relevant earnings’ for the purposes of receiving tax relief on pensions contributions.
Losses – Under the existing regime, losses generated by a FHL business can be carried forward and offset against profits from the same FHL business.
What’s changing?
When the FHL tax regime ends, the tax treatment of these properties will likely become more aligned to that of standard residential rentals. This will result in:
- Interest deductions capped at the basic Income Tax rate.
- Abolition of capital allowances for new expenditures, although relief for replacing domestic items will remain.
- Income no longer counting as UK relevant earnings for pension relief purposes.
- BADR, Rollover Relief and Business Asset Gift Relief will no longer be available, though some transitional provisions may apply.
- Profit splitting for jointly owned FHLs will also cease, aligning with rules for traditional investment properties where income must be split according to ownership shares. This will remove the current flexibility FHL owners have to optimise their tax liabilities by adjusting income distribution.
What should you do next?
If you are running a FHL business or managing FHL properties, you have until April 2025 to take full advantage of the available tax reliefs. Now is the perfect time to claim capital allowances on your eligible properties if you haven’t already done so.
If you have delayed making a capital allowance claim due to cash flow concerns or a lack of urgency, it is important to act now to secure these tax benefits.
Even if your FHL business is currently running at a loss, claiming these allowances can still be a smart move. It can increase the amount of loss you report, which you can carry forward to offset against future profits.
Plus, you can review and claim allowances for past expenditures as long as your FHL business is still up and running.
Alternatively, you might want to consider selling your property, especially if you planned to do so already, as the sale could benefit from the current 10 per cent Capital Gains Tax relief under BADR.
If you own a furnished holiday let, and would like to discuss how these upcoming changes may affect you, don’t hesitate to get in touch.
