During the spring budget 2024, the (then) Chancellor announced that there would be an abolishment of the furnished holiday lets (FHL) tax regime from 6 April 2025.
Despite the change to a Labour government in early July, the abolition of the FHL regime is still set to go ahead, and the policy papers and draft legislation were published on 29 July 2024.
Based on the draft legislation, the current tax advantages for landlords who let out furnished holiday properties on a short-term basis will be removed and replaced with the same tax rules that currently apply to buy-to-let properties traditionally with long-term tenants.
Our experts have reviewed the latest publications and have outlined what these changes will mean for current FHL owners and how the new Labour government will be bringing in these changes.
The current rules
Broadly, FHLs benefit from a number of favourable tax treatments when compared to ordinary buy-to-let property businesses.
Qualifying FHLs currently benefit from a full deduction of finance costs which can be set against rental profits, giving full tax relief for the costs incurred at the individual’s marginal rate. These are costs such as mortgage interest payments which, from April 2017 been subject to restriction for other buy-to-let properties.
FHL’s also benefit from the availability of capital allowances on plant and machinery and the potential for Capital Gains Tax reliefs such as Business Asset Disposal Relief (BADR), roll-over relief and gift relief.
FHL profits are also treated as relevant earnings for the purposes of making pension contributions, meaning that these profits could increase the maximum amount of tax-advantaged pensions contributions which can be made by an individual.
In order to qualify as a FHL, the property must generally be available for let for at least 210 days per year and it must actually be rented on short term lets (less than 31 days) for at least 105 days per year.
What do the changes mean for FHL owners?
From 6 April 2025, FHLs will be treated as ordinary residential property lets and be subject to the same tax treatment.
This will mean that FHL owners will only receive tax relief for finance costs at the basic rate (currently 20%) through a deduction from their income tax liability. Following the recent hike in mortgage interest rates, this could significantly affect individuals who are higher rate or additional rate taxpayers who currently receive relief for this interest at 40% or 45%.
The availability of BADR, which allows a reduced Capital Gains Tax rate of 10% on the first £1 million of lifetime capital gains on the disposal of business assets, will no longer apply to the disposal of FHLs. Therefore, individuals realising a gain on the disposal of their FHL may be liable to Capital Gains Tax at the basic rate of 18% or the higher rate of 24%.
FHLs are treated as a trading business asset and profits are treated as relevant earnings which could increase the maximum amount of tax-advantaged pension contributions an individual could make. However, profits from ordinary buy-to-let properties are not classed as relevant earnings. From 6 April 2025, FHL profits will no longer be classed as relevant earning. This will come as a big hit to those who rely heavily on FHLs to contribute to a pension scheme.
Transitional rules
Existing FHL owners with a pool of capital allowances can continue to claim writing down allowances from 6 April 2025 until the pool has been exhausted, however, any additional expenditure made after 6 April 2025 will not be eligible for a claim to capital allowances. Instead, any new expenditure would be relievable under the Domestic Items Relief which currently applies to non-FHL property businesses. This relief enables landlords to claim an allowable deduction when they make like-for-like replacements of movable furniture, furnishings and household appliances.
Any trading losses generated from a FHL property business which have not been fully relieved will be carried forward and used against subsequent property business profits. Where additional buy-to-let properties are owned, the losses of the FHL can be utilised against future profits of all properties within that business. Under the current rules, FHL profits and losses are kept separate from profits and losses of other property businesses.
The separation of profits and losses from UK and non-UK property business will remain unchanged from 6 April 2025.
BADR will be available on disposals of FHL properties prior to 6 April 2025, provided the qualifying conditions are met. BADR would still be available after 6 April 2025 where the property is disposed of within the 3-year relief period following cessation of the FHL business, provided the business ceased prior to 6 April 2025. Eligibility for roll-over and gift relief will also cease as of 6 April 2025.
An anti-forestalling rule has been put in place effective from 6 March 2024 to prevent taxpayers obtaining the benefit of the current tax advantageous regime by entering into an unconditional contract of sale before 5 April 2025. This anti-forestalling rule applies to claims to BADR, roll-over and gift relief. Sales to unconnected third parties are unaffected.
Concluding remarks
‘The abolition of the FHL regime removes a favourable tax treatment which has been in place for over 40 years. Whilst there may be some benefits in terms of simplification of investment property reporting, these changes will come as a big hit to FHL owners.’
‘Heavily leveraged landlords may consider transferring ownership to a company vehicle in order to preserve a full deduction for interest costs, but this is likely to carry a significant capital gains tax and stamp duty land tax cost. Any change in ownership structure will therefore need to be considered in detail.’
Our experts are available to help if you would like to discuss any this or any other tax, audit or accountancy queries. Please call our Leicester office on 0116 254 9262, or Loughborough office on 01509 263 500. Alternatively, our contact form is here.