Opportunity knocks for holiday lets owners

From April 2025, the present tax breaks enjoyed by owners of Furnished Holiday Lets (FHLs) will cease and FHL income and gains will be taxed in the same way as other property businesses.

Currently, FHL owners benefit from tax advantages, as compared to non FHL owners, in four key areas:

• 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 reliefs from taxes on chargeable gains for trading business assets; and
• inclusion as relevant UK earnings when calculating maximum pension relief.

According to HMRC, the distinction for a furnished holiday let was introduced in 1984 and provided different and more beneficial tax treatment for short-term lettings within the property investment sector. Repealing the beneficial tax treatment for furnished holiday lettings promotes fairness by removing the tax advantages that furnished holiday let landlords have over other residential property landlords.

From April 2025

These tax changes will take effect from 6 April 2025 for income tax and capital gains tax (CGT) purposes, and from 1 April 2025 for corporation tax on corporate income and gains.

The changes will remove the tax advantages that current FHL landlords have received over other property businesses in 4 key areas by:

• applying the finance cost restriction rules so that loan interest will be restricted to basic rate for Income Tax;
• removing capital allowances rules for new expenditure and allowing replacement of domestic items relief;
• withdrawing access to reliefs from taxes on chargeable gains for trading business assets; and
• no longer including this income within relevant UK earnings when calculating maximum pension relief.

After repeal, former furnished holiday let properties will form part of the person’s UK or overseas property business and be subject to the same rules as non-furnished holiday let property businesses.

Transitional arrangements

According to HMRC the following transitional arrangements will apply:

• Businesses with FHL properties will no longer be eligible for more beneficial capital allowances treatment but will instead be eligible for ‘replacement of domestic items relief’ in line with other property businesses. Where an existing FHL business has an ongoing capital allowances pool of expenditure, they can continue to claim writing-down allowances on that pool. Any new expenditure incurred on or after the operative date must be considered under the property business rules.
• Under current rules a loss generated from a FHL property business can only be carried forward and used against future profits of that same FHL business. After the changes, former FHL properties will be part of the person’s UK or overseas property business as appropriate, that property business will then include the amalgamated profits and losses of all the properties in that business.
• Persons may have losses to carry forward from their FHL business after repeal. Losses generated from this FHL business will be permitted to be carried forward and be available for set off against future years’ profits of either the UK or overseas property business as appropriate.
• Under current rules FHL properties are eligible for roll-over relief, business asset disposal relief, gift relief, relief for loans to traders, and exemptions for disposals by companies with substantial shareholdings. After the changes eligibility for the reliefs will cease, however, where criteria for relief includes conditions that apply in a future year these specific rules will not be disturbed where the FHL conditions are satisfied before repeal.
• In relation to business asset disposal relief, where the FHL conditions are satisfied in relation to a business that ceased prior to the commencement date, relief may continue to apply to a disposal that occurs within the normal 3-year period following cessation.
• There is also an anti-forestalling rule which will prevent the obtaining of a tax advantage through the use of unconditional contracts to obtain capital gains relief under the current FHL rules. This rule applies from 6 March 2024.

Opportunity knocks

Which means between now and April 2025 there is still time for present FHL owners to capitalise on the current, generous tax breaks.

To see how you could benefit, if you own FHL properties, please call so we can help you consider your options. And don’t forget, many of these options will close April 2025.