Furnished holiday let tax changes in 2025

[UPDATE 29 JULY 2024: draft legislation published.  Anti-forestalling rules for disposals where an unconditional contract for sale is entered into between 6 March 2024, but completion is not until 6 April 2025 or later, have been confirmed. ]

[UPDATE 7 NOVEMBER 2024: Further HMRC guidance on FHL abolition. Further guidance surrounding issues such as capital allowances, business cessations, jointly owned property, CGT and anti-forestalling.]

The March 2024 Budget announced significant changes to the special tax rules for Furnished Holiday Lettings (FHLs), to take effect from the next tax year starting 6 April 2025.  

Subject to the final details being made available, and the outcome of the 4 July 2024 election, this could impact on how you manage your holiday lettings, and action may be needed before April 2025.

Note that the legislation for these changes was not enacted before parliament was dissolved for the general election.

Why are the changes being made?

The government’s stated reason to abolish the FHL tax regime is to incentivise longer term residential letting by removing the differential tax treatment; and to create a more simplified tax system.  

The estimated additional tax to be raised from the change is minimal in the overall tax take (£35m in the first year rising to £245m by 2028-29)

What are the key changes?

The following tax advantages will no longer be available from 6 April 2025.

Finance Costs Deduction  

You can currently deduct the full amount of mortgage interest in calculating the taxable profit.  However, this deduction will no longer apply after April 2025.  Instead, there would be a “tax reduction” of mortgage interest at 20%.

• Planning point – how will this impact on the level of taxable profits and your overall level of taxable income?  Will your taxable income go above the limits for the entitlement to personal tax allowances (£100,000) or to child benefit (£60,000)?  

Tax deduction for furnishings etc.  

You can currently claim a tax deduction for the initial cost of furnishing a property.  With other types of residential lettings, you can only claim a tax deduction for replacement furnishings.

As FHLs are currently treated as a trade, you can claim capital allowances on items that are treated as fixtures to the property such as central heating systems, air conditioning, alarm systems.  These allowances cannot be claimed for other types of residential lettings.  

• Planning point – consider advancing expenditure to this current tax year.

Relevant Earnings for personal pension contributions

Profits from FHLs currently count as relevant earnings for pension contributions.  This benefit will cease.

Flexibility in the profit allocation

If the property is jointly owned by spouses, the profits can currently be allocated to the co-owners in any proportion, for example to the person doing the majority of the work in managing the lets.  With other types of residential lettings, the default tax position is a 50:50 split of the profit between spouses.  

• Planning point - Does action need to be taken to avoid the default 50:50 split of the profits from April 2025?

Capital Gains Tax Reliefs

With tax treatment as a trade, properties used for FHLs can qualify for Capital Gains tax reliefs that have been only available to trades:-

• 10% capital gains tax rate through Business Asset Disposal Relief.
• Hold-over relief if gifting the property, for example to children.
• Roll-over relief if selling property 1 to replace with property 2.  

The capital gains tax rate on other residential properties is 24% (18% to the extent that the capital gain is within your basic rate tax band); with no entitlement to Hold-over relief or Roll-over relief.  

Even though the changes take effect from 6 April 2025, anti-forestalling rules for capital gains tax apply from 6 March 2024.  We are awaiting details, but it may be too late to make use of hold-over relief to gift properties.

• Planning point - can other routes be used to gift property and defer the tax charge?

More details to come

Since the Spring Budget announcements about FHLs, there has been little further information from the government. A consultation document is awaited with more details about what will change, together with draft legislation. This will now be after 4 July 2024 election and will depend on the formation of the new government.

In particular, clarity is needed on how transitional provisions will apply in respect of such matters as capital allowances and losses. HMRC says that details of the transitional provisions will be made clear in draft legislation and accompanying documentation soon.

Until then, there remains some uncertainty about the precise changes. Such issues as VAT and Inheritance Tax Business Property Relief (BPR), for example, may not be impacted by the abolition of FHLs, but we await further clarity.

In fact, HMRC has said that it does not anticipate that the abolition of the FHL regime will affect the application of BPR. HMRC’s view, as expressed in its published manuals at IHTM25278, is that FHLs will in general not qualify for BPR.  

Adjustments to the business to qualify for trading status?

The FHL rules were first introduced in 1984 to prevent the provision of breakfast being the determining factor as to whether seaside accommodation was a bed and breakfast business and so trading treatment; or residential letting and therefore not a trade.  

Because of the historic advantages of meeting the conditions for FHL status, we have not had to review whether the activity could in any case be treated as a trade because of the level of services offered to guests.  

We can help you by assessing the impact of these changes on you and we can identify and discuss with you whether there are any opportunities to take action in this current tax year. 

As part of this assessment, we can consider the -

• Impact on level of taxable income from changes to interest deduction and on cost of furnishings etc.
• Impact on the profit allocation defaulting to 50:50
• Impact on loss of capital gains tax reliefs

Get in touch

Can we help you with your furnished holiday lets? Please contact Peter or Stella for a conversation, or your usual Bishop Fleming advisor in the first instance.