Tax changes for furnished holiday lets (FHL’s)

If you own a furnished holiday property, you may wish to consider taking action before 5 April 2025.

In the Spring Budget, it was announced that the Furnished Holiday Let Regime will be abolished and draft legislation has now been published, which has provided some clarity on transitional relief and anti-avoidance.

Below we have highlighted the key points from this new legislation and how these may affect you from an income tax and capital gains tax perspective:

Mortgage interest

One of the most significant changes is that, from April 2025, relief for mortgage interest will be given as a 20% tax credit, rather than as a deduction from taxable profits as it is currently. This change will result in reduced tax relief for higher and additional rate taxpayers, lowering their rate of relief from 40% and 45% respectively and therefore increasing taxable profits.

Losses

Another key change is that from April 2025, you will be able to carry forward any losses from FHL’s and potentially offset them against future profits of other rental properties.  Previously, you could only offset FHL losses against FHL profits and not against other residential properties, so this is a small positive amidst all of the other changes!

Capital gains tax on furnished holiday lets

At present, Capital Gains Tax (CGT) on the sale of FHL’s may qualify for Business Asset Disposal Relief (BADR), allowing the first £1 million of lifetime gains to be taxed at 10%. Also, gains arising from the disposal of an FHL may be deferred through the purchase of certain new business assets.  However,  from April 2025, the standard CGT rates applicable to residential property CGT rate, currently 18% basic rate and 24% higher rate will apply to all residential property disposals and the option to 'roll over' gains into new assets will be eliminated.

Capital allowances and Allowable Expenses

FHL businesses can currently claim capital allowances against fixtures and fittings, furniture, etc and also against the part of the purchase cost of the property which relates to ‘integral features’ (heating, wiring, electrical systems, etc.) which can be very valuable in terms of tax relief.  However, from April 2025, FHL’s will no longer be able to claim capital allowances and instead will only be able to claim expenses under the rules for ordinary residential properties, which are more restrictive.  Although please note that any existing capital allowance pools may be carried forward and continue to be written down at the relevant rates (so no balancing charges will be created due to the FHL regime ending).

Pension Contributions

Tax relief for personal pension contributions is currently available up to the greater of £3,600 or 100% of net "relevant earnings". Income that currently qualifies as net relevant earnings includes salary, self-employment and profits from FHL’s. However, from April 2025, FHL profits will no longer count as net relevant earnings for this purpose, so your potential to receive tax relief on pension contributions may be restricted.

What action do furnished holiday let owners need to take?

Review your letting activity

It is worth relevant individuals reviewing their FHL activity to consider how they could take advantage of the key tax benefits which are still available up to 5 April 2025, such as claiming any previously unclaimed capital allowances, as there is a window of opportunity to do this.

Calculate what your tax position will be after April 2025 if you take no action

Once you have calculated how much extra tax you will need to pay, it will be easier to make a decision on whether to continue letting your holiday home or to cash in and sell the property (see below).

Consider selling or gifting the property

You may wish to take advantage of the 10% CGT rate and sell the property whilst BADR relief is still available (though you would have to be quick!).  You may also wish to consider gifting the property to another individual(s) as, while FHL’s are still considered business assets, you the option to ‘holdover’ the gain which you will not be able to do after 5 April 2025.

How can we help?

More people are investing in property than ever before. Whether you have a second home in the countryside, a property abroad or a buy-to-let portfolio, the Hawsons tax team can help with your property taxes.

Our specialist property tax team can help with:

• The preparation of property accounts
• Calculating property tax
• Advice on ownership structure
• Capital Gains Tax planning
• Appropriate reliefs and allowances

Find out more about our property tax services