Furnished Holiday Lettings Tax Regime to be Abolished

Hospitality and Tourism is a key sector in the South West and this drives the demand for Furnished Holiday Lettings in our region.  In the Spring Budget last week, the Chancellor announced that the Furnished Holiday Lettings (FHL) tax regime will be abolished from April 2025.

Draft legislation is to be published and will include anti-forestalling measures that will apply from 6 March 2024. The effect of abolishing the rules will be that the tax advantage of short-term furnished holiday lets versus longer-term residential lets will diminish.  This will clearly have a significant impact in the South West and indeed on our a lot of our clients.

Whilst we await the draft legislation to confirm the detail of the  changes, below we consider our understanding of the key impacts.

Tax advantage changes

Currently, interest that is charged on borrowings and mortgages is fully deductible in calculating the taxable profits of a furnished holiday lettings (FHL) business.  For those that pay higher rates of income tax at 40/45% on these profits, tax relief is obtained at these higher rates.  The rule change will mean that mortgage interest will no longer be a tax deductible expense against profits.  Instead, the interest cost will be treated as a tax credit at the basic rate of income tax which is offset against tax payable.

Capital allowances are currently available to qualifying FHL’s which gives valuable income tax relief on the purchase of fixtures (such as furniture and soft furnishings, fitted kitchens, plumbing and electrical works).  The proposed change means that capital allowances will no longer be available on these expenses from April 2025.  Regarding historic expenditure and previously claimed allowances, there is no details yet on how these would be treated and whether these would be clawed back in full or partially.

Selling your Furnished Holiday Let

Another change that will impact individuals is what happens when selling their FHL property.

Under the current furnished holiday let rules, these types of property are treated as a trade, so as an owner you are able to claim Business Asset Disposal Relief (BADR), which results in any gain being taxed at a rate of 10% after the deduction of your annual allowance.

With the proposed changes from April 2025, BADR will no longer be available on the disposal of the property, and the gain will instead be taxable at the residential property capital gains tax rates.  These rates were also subject to change in the budget, with the Chancellor announcing that the residential capital gains tax rate paid by higher rate tax payers will decrease from 28% to 24% effective from 6 April 2024.

In addition to this, business asset rollover relief, which is where a gain made on the sale of an FHL property can be deferred, if the proceeds were reinvested in another qualifying business asset (typically another FHL) will also be removed from 6 April 2025.

Further considerations

Currently profits from Furnished Holiday Lets are treated as “relevant earnings” for the purposes of pension contributions.  Under the proposed changes this will cease, which may have an impact on the level of pension contributions individuals can make.

For jointly owned furnished holiday lets, how income is allocated for tax purposes between the owners will also change.  Currently there is flexibility on how the profits are shared, but going forward the default will be a 50:50 split which may have income tax implications where the owners pay tax at different rates.

Given the income and capital tax implications of abolishing the FHL regime, obtaining early advice over the next 12 months to help plan will be important.