Plans are underway to scrap the furnished holiday lettings (FHL) tax regime starting from April 2025, with draft legislation now available.
So, if you have a holiday home, now might be the time to investigate the upcoming changes to your tax benefits and take action accordingly.
Starting April 2025, the tax breaks for Furnished Holiday Lets (FHLs) will no longer be available, which means you’ll lose out on the current tax advantages.
Right now, FHL owners benefit from several tax perks, including:
- Capital allowances: FHL owners can currently claim up to £1 million of capital expenditure through the Annual Investment Allowance (AIA).
- Capital Gains Tax: FHL owners might be eligible for Business Asset Disposal Relief (BADR), which offers a lower tax rate compared to Capital Gains Tax (CGT) if their activities are considered to be a business.
- Financial costs: Expenses such as mortgage interest can be fully deducted from rental income, leading to a substantial reduction in taxable profits for FHLs, unlike non-FHL rentals.
- Relevant earnings: Income from FHLs is classified as earned income, which means it qualifies for relief at the owner’s highest rate of Income Tax.
The upcoming changes
Following the abolition of this regime, it is expected that tax regulations governing FHLs will align more closely with those applicable to residential property rentals.
This means that interest deductions will be limited to the basic rate of income tax and capital allowances for new expenditures will be scrapped, though you’ll still get relief for replacing domestic items.
Additionally, income will no longer count towards your UK earnings when figuring out the maximum pension relief you can receive
From April 2025, the flexible profit splitting for jointly owned FHLs will come to an end, bringing them in line with traditional investment properties where income division strictly follows ownership shares.
This change will eliminate the current tax planning benefit that FHL owners enjoy, which allows for optimised tax liabilities by adjusting income allocations between owners.
What classifies as a FHL?
FHLs must meet certain criteria including:
- Located in the UK or European Economic Area (EEA).
- Actively rented out with the intention of generating profit.
- The property is available for FHL rental for a minimum of 210 days annually.
- Commercially let as an FHL for at least 105 days per year.
- Long-term rentals (over 31 consecutive days) do not exceed 155 days per year.
- The property is furnished sufficiently for occupancy
What happens next?
If you own an FHL property, it’s worth exploring your options before the rules change in April 2025.
Although the abolition was introduced by the previous Conservative Government, Labour has confirmed it intends to proceed with these changes.
It’s important to take professional advice quickly to maximise the use of the 100% annual investment allowances which can still be claimed this year. Existing allowances as at April 2025 can also continue to be claimed beyond this date, and losses in the FHL business can also be carried forward into the 2025 financial year.
You might consider selling the property if that was part of your plan, as the sale could benefit from the current 10 per cent Capital Gains tax relief provided by BADR.
Alternatively, gifting the property could be a part of your succession planning.
Given the potential tax implications of the FHL regime being abolished, seeking professional advice is advisable.
The removal of CGT reliefs is likely to lead to higher tax liabilities in the future, so planning ahead over the next year will be crucial.
