The favourable tax treatment previously given to furnished holiday lets (FHLs) will be abolished from 1 April 2025 for Corporation Tax and 6 April 2025 for Income Tax. Going forwards, income from a FHL will be treated in line with all other property income, in a bid to promote fairness and align tax rules between FHLs and other property businesses.
The current rules provide beneficial tax treatment for FHLs so that they are treated more like trading rather than property businesses. This is in line with hotels, care homes and common areas within student accommodation.
The scope for Capital Allowances claims
When the abolition comes into force, those who run FHLs will no longer be able to claim Capital Allowances on new expenditure, although there will be transitional rules with a short-term allowance where an existing FHL is partway through an ongoing project. Any new expenditure incurred on or after the operative date will be treated under the property business rules. However, where an existing FHL business has ongoing Capital Allowance pools of expenditure, they can continue to claim writing-down allowances on these.
Capital Gains Tax (CGT) implications
The abolition of the FHL regime also affects the CGT position on disposal of a holiday let property either by way of a gift or on sale. Several CGT reliefs currently available on disposal of a qualifying FHL property will be removed completely from April 2025, subject to Business Asset Disposal Relief (BADR) continuing to be available on a disposal within two years of a pre-April 2025 cessation of that business.
Income Tax implications
The reclassification of FHL income as general property income is a key change, aligning it with other rental income streams and ending certain perceived preferential treatments.
Previously, FHL owners could fully deduct finance costs, such as mortgage interest, against rental income, but this will now be capped at the basic rate of Income Tax. This shift could significantly increase tax liabilities for those with substantial financing costs.
The ability to allocate FHL profits between spouses or civil partners for tax purposes is being removed. Currently, FHL profits generated from a jointly owned property can be allocated based on which spouse operates the holiday letting business and this can be tax efficient overall. With the abolition of the FHL regime, this flexibility will no longer be available, potentially leading to higher income tax bills for many couples.
Profits from FHLs are currently considered “relevant earnings” for pension contribution purposes. An individual’s relevant earnings can act as a ceiling for the pension contributions an individual can make whilst receiving tax relief. Profits from residential lettings are not considered relevant earnings, therefore if an individual’s income is solely from residential lettings, they may only be able to contribute £3,600 gross to their pension to benefit from tax relief. This could limit the ability to make tax-efficient pension contributions, impacting long-term retirement planning and reducing the potential for building up pension funds.
Planning considerations
Those running a FHL business or operating FHLs have a window of opportunity from now until April 2025 to utilise the tax reliefs available. In the case of Capital Allowances, they can make claims on their qualifying properties. If making such a claim has previously been delayed due to cashflow reasons or non-urgency, now is the time to make the claim so the tax advantage can be secured.
It should be noted that if the FHL business is loss making, a Capital Allowance claim will still be beneficial as it will increase the losses which can be carried forwards to future periods and off-set future profits. There is no limit on how far back in time the expenditure was incurred to carry out a Capital Allowance review, provided the FHL is still in existence and the asset on which the claim is based is still owned.
We are here to help
If you believe you might be affected by the changes to the FHL tax regime in April 2025, please get in touch.
Cara Landers
Senior Manager at Azets
