Furnished Holiday Let: Prepare For The Changes Coming?

In the March 2024 Spring Budget former Chancellor Jeremy Hunt announced plans to abolish the Furnished Holidays Lettings (“FHL”) regime from 6^th April 2025. Labour is now moving these plans forward with the publication of a policy paper and draft legislation outlining the changes.

Currently, a property qualifies as a Furnished Holiday Let if it is located in the UK or the European Economic Area (EEA) and meets the following conditions:

• The property is let furnished;
• It is available to let for 210 days in a tax year;
• The property is let for 105 days in a tax year (not including lets that exceed 31 days);
• Lettings that exceed 31 days must not exceed a total of 155 days in a tax year.

For a new FHL, the above tests apply to the first 12 months from when the letting began, rather than the tax year.

Owners of FHLs enjoy a wide range of tax benefits including:

• Rental profits count towards net relevant earnings for pension purposes.
• Mortgage interest is fully deductible and not subject to the basic rate tax reducer.
• Capital allowances can be claimed on capital expenditure.
• Business Asset Disposal relief (BADR) may be available to claim on disposal, meaning any capital gain is taxed at a lower rate of 10%.

From 6th April 2025 the above tax perks cease and, instead, holiday rentals will be treated the same as any other residential rental property. Some of the tax benefits associated with FHLs that will no longer be available have now been addressed in the recently published policy paper and draft legislation.

What changes are coming for furnished holiday let owners?

Pension Contributions

From 6^th April 2025 profits from FHL rental properties will no longer count towards net relevant earnings for pension contributions. This means that where a tax-payer’s only income source is from FHLs their pension contributions will be limited to £3,600 (gross) per tax year.

Mortgage Interest

Where mortgage interest was previously treated as a deduction from rental income relief will now be given via a 20% tax reducer. This means that a higher rate tax-payer previously receiving a deduction at 42% (Scotland) or 40% (r. UK) is now only receiving a deduction at 20% and depending on the level of loan interest this could result in a big increase in tax due on their rental profits.

Capital Allowances

Previously fixtures and fitting would be dealt with via a claim for capital allowances whereas regular property rental businesses were not able to claim in the same way for assets added to their property. Instead, they claimed replacement of domestic items relief giving an immediate deduction against income where old items in the property were being replaced by new ones.

Therefore, many FHL business owners find themselves with capital allowance pools carried forward and have been left wondering what will happen to these once the regime is abolished. There was a concern that where substantial pools were in place FHL businesses would need to “write out” these assets from the pools potentially creating large balancing charges and in turn additional tax liabilities.

However, the draft legislation notes that these pools can continue to be written down meaning the balancing charges should not occur. Any new expenditure on the FHL property would not be able to be added to the capital allowance pool and instead should follow the property business rules.

Capital Gains Tax

From 6^th April 2025 FHLs will no longer qualify for certain reliefs available upon their disposal including Rollover Relief and Business Asset Disposal Relief (BADR).

Rollover Relief currently allows owners of FHL properties to defer the gain in a qualifying asset they have sold by re-investing in another qualifying asset.  Qualifying assets include FHL’s.  This will no longer apply and, for example, owners wishing to sell their FHL property in order to invest in a larger property or one which has the potential to better perform will have to pay CGT on the sale of the original property where they would not have previously.

BADR currently allows owners of FHL properties who qualify to utilise a 10% Capital Gains Tax (CGT) rate on the sale of the property. From 6^th April 2025 a CGT rate of 18% or 24% will apply in line with normal residential property sales.

These are of course all subject to the anti-forestalling rules that were put in place immediately after the budget announcement. This was to prevent tax advantages being obtained via unconditional contracts where exchanges took place on or after 6^th March 2024 but the onward sale happened after 6^th April 2025.

Losses

Previously losses incurred on FHL rental properties were kept separate from losses from other residential property losses. This meant that FHL losses could only be offset against future profits from FHL properties. Going forward the draft legislation notes that these previously ring-fenced losses can now be carried over and utilised against other, non FHL, rental properties in a tax-payer’s portfolio.

If you require further information on the changes to Furnished Holiday Lets, please do not hesitate to contact Jill Walker, Kerry Griffin, or any member of our dedicated Private Client Team.