Navigate the End of the ‘Furnished Holiday Let’

The number of Furnished Holiday Lets (FHLs) in the UK has increased in recent years, driven by the ever-growing popularity of UK ‘staycations’.  However, Jeremy Hunt announced in the 2024 Spring Budget that the Furnished Holiday Letting regime will be abolished from 6th April 2025. This significant change will see many UK taxpayers face increased Income Tax (IT) and Capital Gains Tax (CGT) liabilities from the 2025/26 tax year.

THE END OF FURNISHED HOLIDAY LETS – WHAT DOES THIS MEAN FOR OWNERS?

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:

1. The property is let furnished;
2. It is available to let for 210 days in a tax year;
3. The property is actually let for 105 days in a tax year (not including lets that exceed 31 days);
4. 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. Find more information about what qualifies properties as Furnished Holiday Lettings.

WHAT ARE THE UPCOMING CHANGES FOR Furnished Holiday Let OWNERS?

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 6 April 2025 the above tax perks cease and, instead, holiday rentals will be treated the same as any other residential rental property meaning:

1. Profits will no longer count towards net relevant earnings for pension purposes and therefore individuals may find themselves unable to make the same level of pension contributions. This will be a point of consideration for many as it may influence retirement and pension planning.
2. Relief for mortgage interest will be capped at a 20% tax credit available to offset an individual’s overall tax liability.
3. Capital expenses will no longer be able to be claimed against rental income.
4. Any gain arising on the disposal of the property will be subject to CGT rates of 18% and 24% (28% pre-5th April).

HOW CAN FURNISHED HOLIDAY LET OWNERS MITIGATE THE IMPACT OF THESE CHANGES?

Owners of Furnished Holiday properties have just over 12 months to make plans which can reduce the impact of the upcoming changes.

Individuals may wish to reconsider their pension contributions for 2023/24 and 2024/25, before FHL income is no longer counted towards net ‘relevant earnings’. The annual allowance for pension savings would also need to be considered when making these decisions, to prevent a pension saving tax charge from arising.

Those who are thinking about selling or gifting an FHL property may benefit from accelerating the disposal to take place during 2024/25. It is also worth noting that ‘anti-forestalling’ rules will be implemented to prevent a tax advantage arising by way of unconditional contracts (i.e. contracts with an exchange date pre-5th April 2025 with completion taking place after this date).

For individuals with large FHL property portfolios, incorporation of the businesses could potentially be advantageous. Of course, there are several other factors to consider, and careful planning would be required to establish whether this option would be beneficial.

The impacts of the abolition of the Furnished Holiday Let regime will be different for everyone and those affected are encouraged to seek professional tax advice. If you would like further information on the upcoming changes or would like to understand how they will impact your bespoke circumstances, please don’t hesitate to contact Tom Andrew, Katie Coleby, our Private Client team, or your usual AAB advisor.