At the March 2024 Budget, then Chancellor Jeremy Hunt announced the regime would be abolished from 1 April 2025, with legislation to be published in due course.
Upon taking office, the Labour government announced it would continue to pursue this policy, and that the government would abolish the furnished holiday lettings (FHL) regime from April 2025. Legislation on this will be included in the upcoming Finance Bill.
What do FHL changes really mean?
Under the current rules, landlords who use the furnished holiday lets regime can:
- deduct the full cost of their mortgage interest payments from their rental income
- are entitled to capital allowances on the furniture
- pay lower capital gains tax (CGT) when they sell, and
- are entitled to CGT rollover relief, business asset disposal relief, gift relief, relief for loans to traders, and exemptions for disposals by companies with substantial shareholdings.
One important point to remember is that even if the FHL are eligible for tax breaks usually available to traders as compared to the normal letting business, they are not considered to be trades. Provision for this is made in the Income Tax (Trading and Other Income) Act 2005.
Proposed revisions
This change will remove the tax advantages that current furnished holiday let landlords have received over other property businesses in four key areas by:
- applying the finance cost restriction rules so that loan interest will be restricted to basic rate for Income Tax
- removing capital allowances rules for new expenditure and allowing replacement of domestic items relief
- withdrawing access to reliefs from taxes on chargeable gains for trading business assets
- no longer including this income within relevant UK earnings when calculating maximum pension relief.
So, in essence, from 1 April 2025 all furnished holiday let properties will form part of the person’s UK or overseas property business and be subject to the same rules as non-furnished holiday let property businesses.
There are some specific transitional rules available to the current FHLs:
- continuation of ongoing capital allowances pool of historical expenditures; however, any new expenditure incurred on or after the operative date must be considered under the property business rules
- amalgamation/offsetting of profits and losses of all the properties including former FHL properties as they will be part of the person’s UK or overseas property business as appropriate (historically loss generated from a FHL property business can only be carried forward and utilised against future profits of that same FHL business)
- in relation to business asset disposal relief, where the FHL conditions are satisfied in relation to a business that ceased prior to the commencement date, relief may continue to apply to a disposal that occurs within the normal three-year period following cessation.
There is also an anti-forestalling rule that applies from 6 March 2024 which will prevent the obtaining of a tax advantage through the use of unconditional contracts to obtain capital gains relief under the current FHL rules.
Read an updated summary of FHL changes.
