For nearly four decades, owners of Furnished Holiday Lettings (FHLs) in the UK have enjoyed special tax benefits, including favourable capital gains tax treatment and the ability to offset losses against other income. However, significant changes are on the horizon. The UK government has announced plans to abolish the FHL tax regime, marking a major shift in how these properties will be taxed from April 2025. This change may have significant implications for individuals and businesses involved in the FHL market, including potentially higher tax liabilities and a need to reevaluate investment strategies.

Understanding Furnished Holiday Lettings

Furnished Holiday Lettings are short-term rental properties that meet specific criteria. To qualify, a property must be:

1. Available for short-term letting to the public for at least 210 days per year
2. Actually, let for 105 days or more each year
3. Not used for long-term lets (over 31 days) for extended periods

Properties meeting these criteria have been treated differently for tax purposes compared to other rental properties. They’ve been considered as trading income rather than investment income, offering several tax advantages.

Current Tax Benefits for FHLs

1. Under the current system, FHL owners enjoy several tax perks:
2. Capital allowances can be claimed on furniture and fittings.
3. Full mortgage interest relief is available.
4. Profits can be used for pension contributions.
5. Potential access to lower Capital Gains Tax rates through Business Asset Disposal Relief (formerly Entrepreneurs’ Relief)
6. Various other capital gains tax reliefs, including rollover relief and gift relief

The Upcoming Changes

In the Spring 2024 Budget, the government announced plans to abolish the FHL tax regime. This decision was later confirmed by HMRC in July 2024. The changes will take effect from:

• 6 April 2025 for income tax and capital gains tax purposes
• 1 April 2025 for corporation tax purposes

The government’s rationale for this change is to promote fairness and align FHL tax rules with those of other property businesses. There’s also a hope that this might encourage more properties to be made available for long-term rentals in communities where housing is scarce.

What This Means for FHL Owners

Once these changes come into effect:

• FHL income will be treated the same as other rental income
• Income tax relief on mortgage interest will be restricted to the basic rate (20%) rather than the owner’s marginal tax rate.
• New expenditure on furniture and fittings won’t qualify for capital allowances (although existing allowances can still be claimed until fully used)
• The special capital gains tax treatments, including Business Asset Disposal Relief, will no longer be available for most FHL disposals.

Transition Rules and Exceptions

The government has included some transition rules and exceptions in the draft legislation:

1. Business Asset Disposal Relief may still be available in some cases if the FHL business ceases before 6 April 2025 or if certain conditions are met for the disposal of shares in FHL businesses.
2. Companies with substantial shareholdings in FHL businesses may still qualify for exemptions on disposals in some circumstances
3. Any losses being carried forward from FHL businesses in April 2025 can be set against future income from UK or overseas property businesses.

Anti-Forestalling Measures

To prevent people from trying to take advantage of the current rules before they change, the government has introduced anti-forestalling measures. These apply to contracts entered into on or after 6 March 2024. Essentially, if you enter into a contract to sell your FHL property during this period, but the sale completes after the new rules come into effect, you won’t be able to claim the old tax benefits unless:

• The contract was entered into wholly for commercial reasons or
• The buyer and seller are not connected persons.

In either case, there must have been no intention to avoid the new rules.

What FHL Owners Should Do

If you currently own an FHL property, here are some steps to consider:

• Review your current tax position and how it might change from April 2025
• Consider whether it’s beneficial to sell your property before the new rules come into effect, keeping in mind the anti-forestalling rules
• If you’re planning to keep your property, think about how you might need to adjust your business model to account for the loss of tax benefits
• Consult with a tax professional to understand how these changes will affect your specific situation

The Bigger Picture

The UK government has made significant changes to the tax treatment of Furnished Holiday Lettings (FHL). These changes aim to create a fairer tax system and boost the supply of long-term rental properties. However, there are concerns about the potential impact on the tourism industry. FHL owners should understand these changes and seek professional advice to navigate the new rules. Despite the changes, success in the holiday letting business will still depend on factors such as location, accommodation quality, and service level.