What’s on the horizon for Furnished Holiday Lets and tax relief?
It was announced in the Spring Budget 2024 that the government plans to abolish the Furnished Holiday Let (FHL) tax regime from April 2025, removing the tax advantages for landlords who let short-term FHL properties over those who let residential properties to longer-term tenants.
The Chancellor commented that he did not think it was appropriate for the government to incentivise one type of letting behaviour (FHLs) over another (long-term residential lettings).
With the general election planned for 4 July, and an absence of draft legislation, there is of course a level of uncertainty around the proposed changes, however, this remains a time to act to take advantage of the existing tax benefits for qualifying FHLs.
What qualifies as a furnished holiday let?
There are certain conditions around availability, occupancy and level of furnishings that must be met for a property to be classified as an FHL, the property must be:
- Available for commercial letting 210 days in a year;
- Actually let commercially for at least 105 days; and
- Not let for periods of longer-term occupation (more than 31 consecutive days to the same person) for more than a total of 155 days in a year.
If an FHL meets the qualifying criteria, a range of favourable tax reliefs become available that are not applicable to other types of letting:
- Interest on borrowings is fully deductible in calculating the taxable profits (rather than giving a tax reduction at basic rate in the way that applies for other rental property);
- Capital Gains Tax (CGT) reliefs for traders (Business Asset Rollover Relief, relief for gifts of business assets, and relief for loans to traders);
- Capital allowances are given for fixtures, furnishings, white goods, and so on within the property; and
- The profits count as earnings for pension contribution purposes.
Some of these tax advantages exist because, in tax law, income from FHLs is classed as trading income.
Here we look at what the removal of these tax benefits means for FHLs and how to maximise current tax reliefs.
Capital Gains Tax
There are various CGT incentives under the current FHL regime. The property is treated as a trading asset for the purposes of:
- Business Asset Disposal Relief, meaning that a gain on the sale of the FHL property may be taxed at 10% (providing the gain is covered by the individual lifetime limit, which is currently £1m);
- Business Asset Rollover Relief, which means that a gain made on the sale of an FHL property can be deferred if the proceeds are reinvested in a suitable asset – typically a new FHL property; and
- Gift Hold-Over Relief, which means CGT is not liable if the asset is given away or sold for less than its worth.
The reduction in the higher rate of CGT, from 28% to 24%, combined with the end of the FHL regime and its associated CGT reliefs, may prompt the earlier disposal of second homes currently being treated as furnished holiday lets.
After April 2025, there could be additional tax burdens if a landlord looks to retire or pass on their assets to successors.
Capital Allowances
FHL businesses are entitled to capital allowances on the furniture, white goods, etc. within the property. This is different from general residential lettings, where capital allowances are not available, but relief is given for the replacement of domestic items.
With this in mind, it is worthwhile reviewing any opportunities for capital allowance claims on FHLs as this relief can reduce the tax payable on profits.
How M+A Partners can help and next steps
Furnished holiday lets and associated tax planning are determined by a specific set of circumstances and require careful thought to maximise available reliefs. Despite an absence of firm legislation and a general election on the horizon, this remains an opportune time to ensure immediately available reliefs are fully utilised. Now is the time to act to expedite tax planning before April 2025, including the sale and transfer of property.
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.
