End of tax benefits for furnished holiday lets
09/01/25
This article was originally published in Estates Gazette (EG) magazine on 26 November 2024.
Alongside the publication of the autumn 2024 Budget, the government published a policy paper to clarify the abolition of the furnished holiday lettings tax regime. First announced in the spring 2024 Budget, followed by the draft legislation published on 29 July 2024, the abolition, according to HM Revenue & Customs, “promotes fairness and aligns the tax rules for furnished holiday lettings with those for other property businesses”.
Set to take effect in April 2025, this shift will impact individuals, corporations and trusts involved in renting or selling FHL properties. But how exactly will they be affected, and what can they do to prepare? While the clarifications did not provide resolutions to many of the concerns raised, there is enough certainty to be proactive in assessing the impact of the impending changes and to plan accordingly.
What constitutes an FHL?
Broadly, to qualify as an FHL, a property must meet the following conditions. First, it must be available for rent as holiday accommodation for at least 210 days a year. Then, it needs to be let out commercially to the public for a minimum of 105 days annually. Finally, the total of all lettings that exceed 31 continuous days must be limited to no more than 155 days in total throughout the year.
What’s changing?
From April 2025, FHLs will be treated like standard rental properties, and therefore most operators will lose access to the tax benefits of the current FHL tax regime. This is because, whereas previously income from FHLs was deemed to be trading income provided all the qualifying conditions were met, going forward a trade would need to be demonstrated, which for a letting business is a high bar to reach. Key implications include:
■ Finance costs
Generally, under the current FHL regime, mortgage interest is fully relieved against rental income, whether the property is owned by an individual or a corporate entity. However, from 6 April 2025, most non‑corporate FHL owners will be subject to the finance cost restriction rules. This means they will only be able to claim tax relief on finance costs at the basic rate of income tax.
■ Relief for capital expenditure
Under the current FHL regime, businesses can claim tax relief on some capital expenditure, including plant and machinery or integral features. With an annual investment allowance of £1m, or the possibility of full expensing for eligible purchases, this often means that capital items bought for an FHL business are fully deductible against rental income.
However, from April 2025, these generous capital allowances will usually no longer apply. Instead, FHLs will only be eligible for the replacement of domestic items relief, significantly reducing the scope for tax relief on capital spending.
■ Capital gains tax reliefs
Under the FHL regime, as the business is treated for tax purposes as a trading business rather than an investment business, it allows access to certain capital gains tax reliefs and exemptions on disposals which usually only apply to trading businesses. This includes rollover relief, gift holdover relief, business asset disposal relief or substantial shareholding exemption.
From April 2025, as in most cases FHL businesses will no longer be treated as trading businesses, these CGT reliefs will generally no longer apply to most disposals made after that date. However, if a disposal occurs before April 2025 but the conditions for relief include requirements that apply after that date, the relief should still apply, provided all other criteria are met.
■ Pensions
Income from FHL businesses is currently considered relevant UK earnings for pension limit purposes, allowing owners to make higher contributions to pensions. However, from 6 April 2025, this will usually no longer apply, potentially limiting the ability to contribute more to pensions based on FHL income.
Opportunities for strategic planning
The end of the favourable tax treatment for FHLs could trigger significant shifts in the market, with highly geared non-corporate owners likely to exit. Over the next few months, we may see a surge in FHL properties up for sale, alongside a decline in those available for rent. For investors, now is the critical time to reassess their FHL portfolios, weighing both market opportunities and the planning steps that can be taken before the changes bite.
For those planning capital expenditure soon, bringing forward the investment could lead to greater tax relief. Individual investors facing restrictions on finance costs might find restructuring their debt more beneficial. Incorporating the business could also become an attractive option, but it’s crucial to carefully weigh the tax implications and available reliefs before making the move.
It may also be advisable to bring forward succession planning to take full advantage of any available CGT reliefs before the changes take effect.
If the added tax costs are too high and an exit is planned, selling before April could allow CGT reliefs to apply. If a sale isn’t possible, ceasing the trade before then – by ensuring conditions aren’t met – might still enable access to BADR.
As with other recent changes, the unintended consequence could be that smaller, bespoke operators bear the brunt, while larger conglomerates are left to dominate the market.
Understanding anti-forestalling rules
It is important to highlight the anti-forestalling rules, effective from the announcement of the FHL regime’s abolition on 6 March 2024, which prevent obtaining tax advantages through unconditional contracts designed to secure CGT relief under the current FHL rules. Though not yet legislated, these provisions are already in force.
The anti-forestalling rules apply if an asset has been disposed of under an unconditional contract made on or after 6 March 2024, but the asset is conveyed or transferred on or after the date the new rules come into effect in April 2025. In these cases, under certain circumstances, the abolition of the FHL regime will still impact the disposal.
For more support and guidance regarding the abolition of the furnished holiday lettings tax regime, please reach out to Esther Ollech: esther.ollech@mgr.co.uk
