The UK government has recently announced significant changes to the taxation of Furnished Holiday Lettings (FHL) and published the draft legislation. These changes, effective from April 2025, will significantly impact the tax landscape for individuals and businesses who own FHLs. The changes, first introduced in the 2024 Spring Budget, will bring an end to the favourable tax treatment that FHLs have historically enjoyed.
In this article, we will explain what the FHL regime is, the upcoming changes, who will be affected, what tax benefits will be lost, and what steps holiday let owners need to take to minimise their tax burden.
What Is the FHL Regime and What’s Changing?
The Furnished Holiday Lettings (FHL) regime allows owners of qualifying holiday homes to be treated as running a trade for specific tax purposes. This regime offers several tax advantages that distinguish FHLs from other types of rental properties.
To qualify as an FHL, properties must meet certain conditions, such as being available for letting for at least 210 days a year and let out for a minimum of 105 days. FHLs have been eligible for various tax reliefs, including full mortgage interest deductions, capital allowances, and Business Asset Disposal Relief (BADR).
However, starting from April 2025, the FHL regime will be abolished. This means that income and gains from holiday lets will be taxed under the general rules for property businesses. The draft legislation has introduced transitional relief and anti-forestalling provisions to help manage the shift, but ultimately, the advantageous tax treatment of FHLs will end.
Who Will Be Affected?
The upcoming changes will affect individuals, businesses, and trusts that currently operate holiday accommodations classified as FHLs. Landlords who have enjoyed tax reliefs specific to FHLs will need to review their financial arrangements and longer term plans, as these reliefs will no longer apply from April 2025.
Additionally, businesses operating holiday lets through a company will also be impacted. Corporation tax rules for FHLs will change, removing certain benefits such as the Substantial Shareholding Exemption (SSE) for corporate structures.
If you are currently letting out a holiday home that qualifies as an FHL or are considering purchasing one, it’s crucial to understand the financial implications of the new tax rules.
What Tax Benefits Will Be Lost?
Once the FHL regime is abolished, several important tax benefits will disappear. Below are the key reliefs that will no longer be available:
- Mortgage Interest Relief
Currently, mortgage interest on FHLs can be deducted from rental income for Income Tax purposes, providing relief at the taxpayer’s marginal rate. From April 2025, mortgage interest relief will be restricted to the basic rate of 20%, significantly reducing the tax relief available for higher and additional rate taxpayers. - Capital Gains Tax Reliefs
Owners of FHLs have historically been able to claim Business Asset Disposal Relief (BADR), which allows the first £1 million of lifetime gains to be taxed at 10%. Additionally, it has been possible to roll over gains on the sale of FHLs when reinvesting in other qualifying business assets. From April 2025, these reliefs will no longer be available, and gains will be taxed at the standard residential property Capital Gains Tax (CGT) rate, currently set at 24%. - Capital Allowances
Under the current rules, FHL owners can claim capital allowances on qualifying expenditures, such as furnishings and equipment used in the holiday let. However, from April 2025, capital allowances will no longer be available. Instead, owners will only be able to claim deductions for the replacement of domestic items, in line with the rules for other property businesses. - Pension Contributions
Currently, FHL profits are considered ‘relevant earnings’ for pension contribution purposes, meaning they can be used to claim tax relief on pension contributions. From April 2025, FHL income will no longer count as relevant earnings, which will limit the amount of pension tax relief that can be claimed. - Loss Relief
Losses from FHLs are currently carried forward and offset against future FHL profits. After the regime is abolished, these losses will be carried forward and offset against general property business profits instead.
What Action Should You Take?
Given the upcoming tax changes, it’s important for holiday let owners to act now to mitigate the impact on their finances. Here are some key steps to consider:
- Review Your Financial Position
If you own an FHL, now is the time to review how the changes will affect your tax liabilities. Calculate the potential loss of tax reliefs and whether you may need to adjust your financial plans for the future. Consulting a tax planning specialist can help you understand the impact of these changes and how best to prepare. - Consider Selling the Property
With the FHL regime set to end, some owners may wish to sell their properties before the new rules come into effect. Selling before April 2025 may allow you to take advantage of the current reliefs, such as Business Asset Disposal Relief and the lower CGT rate of 24%. However, it’s important to consider the reduced CGT exemption, which may increase the overall tax payable. Always seek advice to understand the full tax implications of a sale. - Evaluate Pension Contributions
If you have been relying on FHL income to claim pension tax relief, you will need to reassess your contribution strategy. Since FHL profits will no longer count as relevant earnings from April 2025, higher-rate taxpayers should consider maximising pension contributions before the changes take effect. - Capital Allowances
Owners of FHLs should make sure they have claimed all eligible capital allowances before the April 2025 deadline. This includes any expenditure on fit-outs or refurbishments. Working with a capital allowances specialist can help you maximise your claims and ensure that no reliefs are missed before the rules change. - Consider Gifting the Property to Family
If you plan to pass your holiday property to a relative, now may be the time to do so. Gifting the property before the FHL regime ends may still allow you to claim certain reliefs, such as ‘holdover’ relief, which defers the CGT liability to the recipient. However, be mindful of the wider Inheritance Tax implications if you continue to use the property after gifting it.
Final Thoughts
The abolition of the Furnished Holiday Lettings regime marks a significant shift in the taxation of holiday lets, and owners need to be proactive in understanding how the changes will impact them. Whether you’re considering selling your property, passing it on to family, or simply reviewing your financial arrangements, it’s crucial to act before the changes come into force in April 2025.
Ward Goodman, a trusted accountancy and financial services firm based in Dorset, is here to help you navigate these upcoming changes. Our team of tax and financial planning experts can provide tailored advice to help you make informed decisions about your holiday let business. Whether it’s understanding the tax implications, reviewing your overall financial strategy, or maximising any remaining tax reliefs, we’re ready to assist.
For expert guidance and support, contact Ward Goodman today and ensure that your finances are prepared for the changes ahead.
Are you a local Dorset Holiday Home Owner?
Ward Goodman accountants are having an online talk at Dorset Cottage Holidays to discuss tax changes in FHL and capital gains and what it could mean for second home owners in Dorset. Join our free online webinar on Oct 22nd, 2024 at 7PM.
