Furnished Holiday Lettings

In the Spring Budget 2024 the government announced that the Furnished Holiday Letting (FHL) regime is to be abolished from April 2025. Draft legislation will be published in due course, although with the calling of an early election, it is very possible some of the proposed changes will not be implemented or delayed.

Qualifying FHLs have historically benefited from several tax advantages compared to standard residential letting business, in particular full relief on interest costs, the availability of capital allowances and business asset disposal relief (a reduced CGT rate of 10% on gains up to a £1million lifetime limit) and counting as relevant earnings for the purpose of making contributions into your pension plan.

Interest Relief Restriction

Currently qualifying FHL’s benefit from full relief on interest costs. The changes will result in effectively only a 20% tax credit going forward.

When interest restrictions were introduced for buy to let individual landlords, there was a phasing in of the interest restriction rules over a number of years. This does not appear to be the proposal for FHL’s and therefore an April 2025 implementation provides FHL landlords little time to assess the impact of the changes and restructure their business accordingly.

Affected landlords will also need to consider if they change their commercial model, for example to longer term tenants, and whether this will also have knock on impacts on other areas of tax such as inheritance tax reliefs.

Capital Allowances

The availability of capital allowances for FHL’s is a valuable relief as it often results in 100% relief being available in the year that the expense is incurred by way of claiming the ‘Annual Investment Allowance’ on the first £1million of capital expenditure. This includes the purchase of white goods, furniture, fixtures and equipment used within the holiday let, as well as integral features such as lighting and plumbing systems. This relief will be removed once the FHL regime is abolished, and landlords will be subject to the normal letting rules for these types of cost.

Under the normal rules for residential properties no deductions are available against income for capital expenditure on assets used in the rental property. Relief is however available in full for the replacement of domestic items under the cash basis whereby the old item, such as furniture and appliances, are being used in the property and is then replaced with a like for like item.

Although capital improvements are not immediately deductible, they may be allowed against Capital Gains Tax upon sale of the property.

Landlords may choose to accelerate any planned capital expenditure in order to qualify for relief ahead of April 2025, although there may be balancing adjustments at the point the FHL business ceases.

Capital Gains Tax

It was also announced that, with effect from 6 April 2024, the higher rate of Capital Gains Tax (CGT) that applies on the disposal of residential property will be reduced from 28% to 24% for higher rate taxpayers.

The abolishment of the FHL regime could therefore result in an increased CGT rate from 10%, i.e. the reduced rate for businesses qualifying for Business Asset Disposal Relief, to a maximum rate of 24%.

The abolishment of the FHL regime would also stop the availability of ‘holdover relief’ when when making a gift of an FHL, perhaps as part of estate planning. Taxpayers may therefore wish to accelerate any plans for a transfer of ownership.

In addition, the reduced CGT annual exemption, which was £6,000 up to 5 April 2024 but is now £3,000 with effect from 6 April 2024, will result in further increases in CGT.

Pension Contributions

Under the current FHL regime, profits are treated as earned income and therefore eligible for tax relief at the individual’s highest rate of income tax when contributed to a pension scheme.

Conversely, profits generated from non-FHL properties are classified differently and not eligible for tax relief in this way. Other earned income, for example employment income and profits from a trade or profession, will continue to qualify for pension tax relief in the usual way.

Any affected landlords will want to consider whether they are able to increase contributions to make use of their pension annual allowance, including any unused allowances from the prior three tax years, ahead of April 2025.

Losses

Losses generated by a FHL business under the current rules can be carried forward to offset against future profits from the same FHL business.

Owners of non-FHL rental properties are subject to different rules which are slightly more flexible in that the losses may be offset against profits from any other rental property.

Get in touch

For more information about the issues raised or to discuss your individual circumstances get in touch with your usual Crowe contact.