Owners of Furnished Holiday Lets (FHLs) have been preparing themselves for the change since the announcement in the Spring Budget, and HM Revenue & Customs (HMRC) have now confirmed further details regarding the abolition of the FHL tax regime from April 2025.
Guidance has been published, clarifying some of the specifics when it comes to the tax changes for FHL landlords. HMRC has also made it clear that the intention of the change is to remove the specific tax rules currently available for FHLs and not to make adjustments to rules around VAT. Holiday accommodation, whether previously qualifying as FHL or not, remains standard-rated for VAT.
What the change means for the tax treatment of furnished holiday lets
The end of the specific tax treatment and separate reporting requirements for FHLs essentially means that, from April 2025, income and gains will:
- Form part of the person’s UK or overseas property business; and
- Be treated in line with all other property income and gains.
The basis of the change is to promote equality over the tax treatment of FHLs compared to other residential properties.
Tax advantages will be removed in the following 4 key areas:
- Finance cost restriction rules will be applied, so that loan interest will be restricted to basic rate for Income Tax;
- Capital allowances rules for new expenditure will be removed;
- Access to reliefs from taxes on chargeable gains for trading business assets will be withdrawn (such as roll-over relief, gift relief and business asset disposal relief); and
- There will no longer be the capacity to include FHL income within relevant UK earnings when calculating maximum pension relief.
Clarification on key issues
Details have also been released in response to queries raised within the FHL tax regime abolition consultation in September 2024.
Jointly owned properties
The end of the FHL tax regime, means that where joint owners of a property are married couples and couples in a civil partnership, profits and losses will be treated as arising to them in equal shares. Exceptions to this rule are if entitlement to the income and the property are in unequal shares and the couple have informed HMRC, using form 17, that their share of profits and losses is to match the share each holds in the property.
Anti-forestalling rule
There is an anti-forestalling rule in place, for unconditional contracts made on or after 6 March 2024, with the disposal taking place on or after 6 April 2025. Capital Gains Tax reliefs will not apply, unless the claim includes a statement confirming that the purpose of entering into the contract was other than to avoid the changes made in connection with the abolition of the FHL regime; or the contract was entered into by unconnected parties wholly for commercial reasons.
Capital allowances and domestic items relief
There will be the ability to utilise ‘replacement of domestic items relief’, in line with other property businesses, rather than the previous capital allowances treatment for FHLs. Where an existing FHL business has an ongoing capital allowances pool of expenditure, they can continue to claim writing-down allowances on that pool until it is used up or a small pool claim is made.
Losses to carry forward
Any losses from a specific FHL business will be permitted to be carried forward and available for set off against future years’ profits of the person’s UK or overseas property business, as appropriate.
Business asset disposal relief
Where an FHL property ceases prior to April 2025, business asset disposal relief may continue to apply to a disposal that occurs within the normal 3-year period following cessation of trade. HMRC says that the date of cessation is “the date from which there are no longer any bookings or lettings nor any intention to resume such activity in future”. HMRC have confirmed they do not consider that the repeal of the FHL tax rules means that an FHL business has ceased.
FHLs commencing in tax year 2024-25
Where a holiday letting business commences in tax year 2024-25 the relevant period for the purposes of the occupancy conditions begins on the first day in the tax year (or accounting period) on which letting commences and may extend past April 2025. However, FHL status only applies to the tax year 2024 to 2025, or to 31 March 2025 for companies.
Timetable for the changes
The removal of the FHL beneficial tax regime will take effect from
- 6 April 2025 for Income Tax and for Capital Gains Tax; and
- 1 April 2025 for Corporation Tax and for Corporation Tax on chargeable gains.
How M+A Partners can help
Furnished Holiday Lets and associated tax planning are determined by a specific set of circumstances and require careful thought to maximise available reliefs.
M+A Partners has a team of experienced property tax experts available to assist with effective tax planning on Furnished Holiday Lets. Please get in touch with us using the details below or email enquiries@mapartners.co.uk.
