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 (assuming the new government does not change the plans), 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 meaning only basic rate tax deductions for interest.
- 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
It is currently believed that the beneficial capital gains tax treatment available to FHLs shall not be legislated for until 5 April 2025; however, as the government is still yet to publish their draft legislation on this matter, we are yet to see anything confirming that this is the case. Once (or if) the draft legislation is published, we will update our clients accordingly, to allow them as much time as possible to make an informed decision, should they be considering selling their FHL property.
What tax planning opportunities are available before the abolition?
If you own a FHL business then you may wish to consider and discuss with us the following tax planning opportunities before 5 April 2025:
- Gifting FHLs to family members to trigger the disposal for CGT purposes and claiming gift holdover relief so no CGT is immediately payable. This may help with overall Inheritance Tax planning and moving assets down generations with a view to survive 7 years from the date of the gift.
- Ceasing the FHL business in 2024/25 and then disposing of the property or properties within 3 years to benefit from CGT business asset disposal relief (10% CGT rate)
- Selling the FHL and deferring the capital gain by claiming business asset rollover relief by reinvesting the sale proceeds into another qualifying asset. This could be useful for future overall tax planning and investing in tax efficient assets.
The window to make changes or crystalise tax reliefs for FHLs is fast approaching under current government plans. With the usual delay in conducting conveyancing transactions on properties, the time to act and obtain advice for owners of FHLs is now.
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 our Tax Advisor, Yvonne Cutts.