Further information has now been made available in respect of the abolition of the Furnished Holiday Lettings (FHL) tax regime that will take effect from April 2025. The measure will remove the tax advantages that landlords who offer short–term holiday lets have over those who provide standard residential properties.
Current legislation and conditions
The current rules provide beneficial tax treatment for FHLs in comparison to other property businesses in these key areas:
- Finance costs – exemption from finance cost restriction rules (which restrict loan interest to the basic rate of Income Tax for other residential landlords).
- Capital allowances – more beneficial capital allowances rules.
- Capital gains tax reliefs – access to reliefs from taxes on chargeable gains.
- Pensions – inclusion as relevant UK earnings when calculating maximum pension contributions.
To qualify as a furnished holiday let, properties must at present:
- Be available for short-term letting to the public for 210 days and actually let for 105 days or more in each tax year.
- Should not be used as a long-term let of over 31 days for significant periods.
When is this coming into effect?
This is due to have effect from:
- 6 April 2025 for income tax and capital gains tax.
- 1 April 2025 for corporation tax, including on chargeable gains.
Proposed changes and potential planning
1. Finance Costs
Going forwards, mortgage interest relief will be restricted in line with other residential properties.
A review of the finance arrangements may be necessary to see if borrowing can be secured against properties where relief would be available. It may also be worth exploring whether the property could be moved into a company.
2. Capital Allowances
Capital Allowance rules will be removed for new expenditure.
It is worth considering whether any payments should be accelerated into the 2024/25 tax year whilst rules are currently in place, so capital allowances can still be claimed.
There will be transitional rules in place meaning taxpayers can continue to claim capital allowances on existing pools at 5 April 2025.
3. Capital Gains Tax Relief
Certain reliefs such as rollover relief, business asset disposal relief, gift relief, relief for loans to traders and exemptions for substantial shareholdings will cease.
Please note properties may still be eligible for certain reliefs as rental properties. If you are considering selling your property it may be worthwhile considering whether selling in the 2024/25 tax year is beneficial.
4. Pensions
FHL income will no longer be considered earnings for purposes of contributing into your pension.
If you would like to consider making larger contributions whilst the income is still qualifying as earnings, this may be beneficial, and we would recommend discussing this with one of colleague in Menzies Wealth Management.
5. Losses
Currently FHL losses can only be used against profits of the FHL business. These losses will be available to use against all property profits. UK and overseas businesses will still remain to be separate.
We would recommend reviewing your circumstances in advance of these changes. If you have any questions relating to this change in legislation and would like to discuss any planning matters, please contact us below:
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