On 29 July, the new government confirmed their intention to scrap tax reliefs associated with Furnished Holiday Lets (FHLs) with effect from 6 April 2025. Draft legislation now published provides clarity on how and when the reliefs will be phased out. If you own an FHL, it is crucial you review your plans and ensure you understand what this change means for you.
What is an FHL?
Under current rules FHLs benefit from preferential tax treatment as compared to other residential rental properties.
Your property may qualify as an FHL if it meets the following criteria:
- Your property is available to let to the public for 210 days, and is actually let for 105 days or more each tax year
- Your property is typically let out for short-term lets under 31 days.
What are the changes?
If you own an FHL, the following changes will apply from 6 April 2025:
- Mortgage interest will no longer be deductible in full from your rental profits. Instead, tax relief on mortgage interest will be capped at the 20% basic rate in line with other residential rental properties.
- Relief for capital expenses will only be provided for the replacement of existing domestic items. You will no longer be able to claim capital allowances on new purchases.
- You will no longer be able to claim capital gains tax (CGT) reliefs such as business asset disposal relief (BADR), rollover relief or gift relief on transactions involving your FHL.
- The income generated from your FHLs will no longer count as relevant income to determine your maximum amount of pension contributions eligible for tax relief.
For companies who hold FHLs, these changes will apply from 1 April 2025.
Transitional measures
The policy paper also outlines a number of measures to support the transition to the new rules:
- If you have claimed capital allowances on assets prior to the legislation coming into force, you can continue claiming writing down allowances on these assets.
- Any losses generated from FHL businesses will be available to offset against either UK or foreign property income, as appropriate.
- The changes will not affect the validity of claims for CGT relief that depend on your property having been an FHL in the past. For example, most businesses that have ceased trading qualify for BADR for up to three years after the cessation of their trade. Similarly, if your FHL business ceases its activities before the introduction of the new legislation, you may be able to claim BADR for the next three years, even after the introduction of the new changes.
- There will however be an anti-forestalling rule to prevent taxpayers from gaining tax relief by artificially manipulating the dates on which transactions involving FHLs take place. This will apply to all transactions undertaken after 6 March 2024.
How can I plan ahead?
Claiming your capital allowances
The current tax year (ending 5 April 2025) will be your last chance to claim capital allowances. If you are considering substantial purchases that currently qualify for capital allowances but won’t qualify for relief under the new rules, it may be sensible to bring those purchases forward into the current year.
Thinking of selling or giving away the property?
In response to the changes to taxation of FHLs, you may consider selling your properties. Or perhaps now is the time to gift it to the next generation to reduce your exposure to inheritance tax. Making a sale or gift now, before the changes take effect could mean that you are eligible for the following reliefs:
- BADR: a lower CGT rate of 10% as opposed to either 18/24% rate for residential property.
- Gift relief: for CGT purposes, gifted properties are treated as having been sold at their market value, meaning they could give rise to a capital gain on which CGT is due, despite not receiving any cash for the transaction. Gift relief enables you to holdover this gain to the recipient of a gift who will then be taxed on the gain only once they dispose of the asset, this means there is no need to pay upfront CGT on the gift.
- Rollover relief: if you are planning to sell your FHL property to invest in a different trade such as a hotel or a bed and breakfast, rollover relief enables you to defer paying the CGT you would have paid on your property until you have sold the new trading asset you have invested in. Please note your entitlement to this relief is conditional on having reinvested the proceeds of sale into a new trading asset.
If you currently own an FHL and would like to make sure you are prepared for the upcoming changes in the legislation, please get in touch.
