The taxation of furnished holiday lettings: key insights for landlords

The Spring Budget 2024 brought a significant shift for landlords involved in Furnished Holiday Lettings (FHLs). The UK Government announced the abolition of the FHL tax regime, a move aimed at levelling the playing field between short-term holiday lets and long-term residential rentals. This decision will significantly impact those operating holiday let businesses, particularly those whose FHLs are part of a larger business operation.

We’ve taken a look at the changes to provide a detailed summary of how they might affect you, what steps you should consider, and the opportunities these changes present.

Current tax benefits for FHL owners

Under the existing FHL regime, landlords enjoy several tax advantages, including:

• Full deductibility of loan interest: Interest on borrowings for FHLs can be fully deducted against taxable profits.
• Beneficial capital allowances: These allowances provide tax relief for fixtures, making it easier to offset costs.
• Capital Gains Tax reliefs: These include the potential for Business Asset Disposal Relief, rollover relief, and gift hold-over relief, providing significant savings upon selling or transferring properties.
• Pension contributions: Profits from FHLs are considered relevant earnings for pension purposes, allowing landlords to boost their pension contributions.
• Income split flexibility: Income from an FHL held jointly by married couples or civil partners isn’t subject to the mandatory 50:50 split, allowing for more tax-efficient income allocation.

Proposed changes: what to expect

From April 2025, the FHL tax regime will be abolished, and income and gains from FHLs will be treated as part of the owner’s broader property business. Key changes include:

• Restricted loan interest deductions: Interest on borrowings will be restricted to the basic rate of Income Tax, aligning with finance cost restriction rules applied to other property businesses.
• Removal of capital allowances: New expenditures on FHLs will no longer qualify for capital allowances.
• Introduction of Replacement of Domestic Items Relief: FHLs will become eligible for this relief, similar to other property businesses.
• Loss of tax relief on eligible gains: Reliefs for trading business assets, such as rollover and gift hold-over reliefs, will no longer apply.
• Impact on pension calculations: Income from FHLs will not count towards relevant UK earnings for maximum pension relief calculations.

These changes will affect anyone operating or selling FHL properties, including individuals, businesses, and trusts.

When will these changes take effect?

The abolition of the FHL tax regime takes effect on 6th April 2025 for Income Taxpayers and 1st April 2025 for those paying Corporation Tax. However, transitional rules have been introduced to help FHL owners adjust.

Transitional rules and your last chance to claim

While the new rules won’t fully take effect until 2025, landlords can still benefit from transitional arrangements:

• Capital allowances: Claims made before the abolition date can continue, allowing you to maximise deductions for past expenditures.
• Loss carry forward: Currently, FHL losses can only be offset against future FHL profits. Under the new rules, these losses can be carried forward and offset against profits from any UK or overseas property business.
• Preserved tax reliefs: Existing qualifications for reliefs like Business Asset Disposal Relief (BADR) remain valid if conditions are met before the changes take effect. If your FHL business ceases before the implementation date, the 3-year relief period for BADR will still apply.

What do these changes mean for landlords?

The new rules will see FHLs treated the same as other property businesses from a tax perspective, simplifying reporting for those with mixed property portfolios. However, the removal of specific tax benefits will likely increase the tax burden for many landlords, particularly those who have relied on the FHL regime to maximise profitability.

Take action now to maximise your capital allowances

With the upcoming changes, now is the time to ensure you have claimed all eligible capital allowances on historic expenditure related to your holiday lets. Whether it’s refurbishment costs or capital allowances on the original acquisition of the property, there are still opportunities to secure tax relief before the new rules come into force.

Get in touch for expert advice

Navigating these changes can be complex, and it’s crucial to understand how the new rules will impact your specific circumstances. If you need tailored advice or assistance with maximising your tax reliefs, don’t hesitate to get in touch with our expert team.

Contact us today at 0202 912 9933 or info@verallo.com to discuss your options and ensure you’re fully prepared for the upcoming changes.