Abolition of the Furnished Holiday Lettings Tax Regime.

Current tax rules provide beneficial tax treatment for furnished holiday lettings (FHLs) compared to other rental properties. These benefits include:

  •  (For individuals) Exemption from finance cost restriction rules (which restrict loan interest to the basic rate of Income Tax for other landlords)
  • More beneficial capital allowances rules
  • Access to Business Asset disposal Relief to reduce the rate of Capital Gains Tax paid when an FHL, or shares in a company owning FHLs, is sold
  • Access to Holdover Relief to hold over a gain where the sale proceeds from an FHL are invested into another business asset
  • Access to Gift Relief when a FHL is gifted by one individual to another
  • Inclusion as relevant UK earnings when calculating maximum pension relief for individuals

One less beneficial aspect of the regime is that if an FHL makes a loss, this can only be set against future FHL profits, it cannot be set against profits from other rental properties that are not FHLs. To qualify as an FHL, a property must:

  • Be available for short-term letting to the public for 210 days
  • Be let for 105 days or more in each tax year/accounting period
  • Not be used as a long-term let of over 31 days for significant periods

The former Chancellor Jeremy Hunt announced that the FHL tax regime would be abolished in his last budget on 6 March 2024 & the draft legislation enacting the change was published on 29 July 2024. The draft legislation:

  • Applies the finance cost restriction rules to all residential properties, so that loan interest will be restricted to the basic rate for Income Tax
  • Removes the availability of capital allowances for new expenditure on plant & machinery but allows for a different relief known as replacement of domestic items relief instead. This relief is less beneficial than capital allowances as it only applies to replacement assets.
  • Removes the availability of Business Asset Disposal Relief for FHLs
  • Changes the definition of FHL income so that it no longer counts as relevant UK earnings for pension relief purposes

These changes will take effect from 1 April 2025 & 6 April 2025 for individuals.  However, there are some transitional rules, which are as follows:

  •  Where an existing FHL business has an ongoing capital allowances pool of expenditure, they can continue to claim writing-down allowances on that pool, but no new expenditure can be added to it
  • Any FHL losses being carried forward at the date of change (5 April 2025) can be available for set off against future years’ profits from any rental property owned by the same individual or company
  • Where the criteria for a relief include conditions that apply in a future year, these specific rules will not be disturbed where the FHL conditions are satisfied before repeal
  • Where an FHL business ceases prior to 6 April 2025, Business Asset Disposal Relief may continue to apply to a disposal made

Within three year period that commences on the day after the cessation of the business subject to various conditions being met the legislation also introduces an anti-forestalling rule to prevent the obtaining of a tax advantage through the use of unconditional contracts to obtain capital gains relief under the current FHL rules. These rules apply where a contract to sell an FHL is entered into between 6 March 2024 & either 1 or 5 April 2024 depending on whether the vendor is a company or an individual, but the asset is conveyed or transferred (and so the contract completed) on or after 6 March/5 April 2025. In these circumstances, the abolition of the FHL rules apply to the disposal for capital gains purposes subject to two exceptions, are as follows:

  • The was entered into wholly for commercial reasons; or
  • The parties to the contract are not connected persons

and in either case no purpose of the contract was to avoid the amendments being made to the tax regime for FHLs.

If you would like some advice on how these changes will affect you, please contact a member of our team by calling 01246 274121 or email taxteam@mitchellsaccountants.co.uk