The Government have announced the removal of tax reliefs for Furnished Holiday Lets (FHL), set to take effect from the 6th April 2025. This change marks a departure from the tax regime that has been in place since 1982, which was designed to offer favourable tax treatment to owners of FHL properties.
Background of Furnished Holiday Lettings Tax Regime
The FHL tax regime was introduced over four decades ago, and provided significant tax benefits, including:
- No restrictions on the deduction of interest and finance costs,
- Eligibility for plant and machinery capital allowances,
- Access to business asset reliefs for Capital Gains Tax (CGT).
These benefits made FHLs an attractive option for property owners, especially with the rise of platforms like Airbnb, which facilitated short-term holiday rentals.
What is Considered a Furnished Holiday Let?
According to HMRC, a furnished holiday let is defined as a furnished commercial property in the UK that meets specific criteria:
- Available for letting for at least 210 days per year,
- Commercially let as holiday accommodation for at least 105 days per year,
- Not occupied by guests for more than 31 days at a time.
Implications of the New Rules from April 6th, 2025
Starting from April 2025, these changes will have several implications for FHL owners:
- Business Asset Disposal Relief (BADR): Currently available on qualifying FHL properties, BADR allows gains to be taxed at a reduced CGT rate of 10%. Under the new rules, FHL owners will be subject to standard residential CGT rates—18% for gains within the basic rate band , and 24% thereafter.
- Capital Allowances: These will no longer be available for fixtures and furnishings. Instead, relief may only be claimed for the replacement of domestic items, in line with rules for long-term lets.
- Mortgage Interest: Mortgage interest will no longer be deductible from profits. Instead, it will be claimed as a tax reducer at 20% of the interest costs, eliminating the potential for higher rate tax relief on these expenses.
- Pension Contributions: FHL income will no longer count as relevant earnings for pension contributions, limiting the tax relief available.
Transitional Relief Measures
Despite the removal of many benefits, the Government has introduced the following to ease the transition:
- 100% annual investment allowances can still be claimed in the current year.
- Losses from FHL businesses can be carried forward beyond April 2025.
- Existing pools of allowances, as of April 2025, can continue to be claimed after the changes take effect.
These upcoming changes represent a significant shift for FHL owners. Proper planning and timely actions can help mitigate the impact and take advantage of any remaining benefits before they are phased out.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.