The End of Favourable Tax Treatment for Furnished Holiday Lettings from April 2025
Posted on 16th September 2024 at 10:37
The UK Chancellor has recently announced a significant change in the tax regime affecting Furnished Holiday Lettings (FHLs). As of 6 April 2025, the favourable tax treatment that FHLs currently enjoy will be abolished. This change marks a significant shift in how income from FHLs will be treated and will impact many property owners across the country.
Current Benefits for FHLs and the Proposed Revisions
Under the current regime, FHLs benefit from a range of beneficial tax rules, which broadly fall under 4 key areas.
Deduction of Finance Costs
Under an exemption from finance cost restriction rules, owners of FHLs can currently deduct the full amount of finance costs, such as mortgage interest, from their FHL income. This effectively reduces the taxable profit from the letting.
Under the proposed changes, this exemption will be removed, and finance costs will be restricted to the basic rate of income tax in line with residential lets.
Business Asset Disposal Relief
On the disposal of an FHL, owners may qualify for business asset disposal relief, resulting in a reduced capital gains tax rate of 10%. This has naturally been very appealing to FHL landlords.
Under the proposed changes, FHL landlords will no longer be able to claim business asset disposal relief upon the disposal of property. It is yet to be confirmed what the capital gains tax rates will be for property disposals in the 2025-26 tax year.
Relevant Earnings for Pension Purposes
Profits from FHLs count as relevant earnings for pension purposes, enabling owners to make tax-advantaged pension contributions.
Under the proposed changes, FHL income will no longer be included within relevant UK earnings when calculating maximum pension relief.
Beneficial Capital Allowance Rules
FHL landlords can currently claim capital allowances on the purchase of fixtures and fittings for the FHL.
Under the proposed changes, businesses with FHL properties will no longer be eligible for more beneficial capital allowances treatment and will instead be eligible for “replacement of domestic items relief” in line with other property businesses.
There are transitional rules in place for existing FHL businesses with an ongoing capital allowance pool of expenditure.
Who Will Be Affected?
This measure will impact owners of furnished holiday homes that are let out on a commercial basis and meet the conditions to be recognised as FHLs for tax purposes. These property owners will need to reassess their financial planning and investment strategies in light of the upcoming changes.
Implementation Date
The current favourable tax treatment for FHLs will be abolished from 6 April 2025. Property owners and investors have a limited window to adjust to these changes and should begin planning now to mitigate potential financial impacts.
Preparing for the Change
In light of these changes, owners of FHLs should be reviewing the impact of these changes to their strategy. We are of course on hand to support you with this.
Conclusion
The abolition of the favourable tax treatment for FHLs represents a significant change for property owners. It is crucial to act now, reviewing your financial position and seeking professional advice to navigate the transition smoothly. While the removal of these tax benefits will undoubtedly present challenges, proactive planning can help mitigate the impact and ensure continued financial stability.
Need support with Furnished Holiday Lettings? Get in touch today.
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