Who is affected?
From 6 April 2025, owners of short-term furnished holiday lettings.
What is it and how does it work?
Currently, owners of furnished holiday lettings (FHLs) benefit from a more tax advantageous treatment of income received from their properties compared to landlords who rent out their properties long term. Some of the current key tax advantages are:
- Interest on loans and mortgages taken out for the purpose of acquiring a FHL is deducted in full from the income when calculating taxable profit.
- Expenses relating to fixtures for a FHL often fall within the Capital Allowances regime with favourable tax treatment.
- Letting profits from FHLs counts as “net relevant earnings” for pension purposes.
- FHLs are considered as a trading business, and as a result any capital gain on the disposal of a FHL may qualify for various capital gains tax reliefs (rollover relief, gift relief and business asset disposal relief- i.e. potentially 10% capital gains tax rate subject to limits).
From April 2025, these tax benefits will no longer apply. Instead, all rental income will be treated the same way as long-term lettings are treated now.
This means:
- The normal restrictions on the deduction of finance costs for residential landlords will apply
- Only expenses relating to the replacement of fixtures such as furniture, carpets, curtains etc will now be claimable
- Letting profits from FHLs will no longer count as “net relevant earnings” for pension purposes
- Capital gains tax treatment will revert to the rules surrounding disposals of residential properties
Why do we think these changes have been made?
The abolition of the FHL regime together with the decrease in the capital gains tax rate on the disposal of residential properties (not a main residence) from 28% to 24% (from April 2024) and the changes in stamp duty land tax multiple dwelling relief (from June 2024), suggests that the overarching aim of these changes is to:
- encourage long-term lettings to tenants
and/or
- encourage the sale of second holiday homes which may only be used for the holiday season, thereby freeing up properties for local people to buy as their main home
What should I do next?
If you would like our help in determining how this change will affect your tax liability if you own a FHL and review what tax planning opportunities are available before 5 April 2025, please contact Liz Higgins, our Head of Private Client Tax.