Last year the government announced the abolition of the Furnished Holiday Lettings (FHL) tax regime. It was a landmark decision which aims at addressing housing accessibility challenges for locals accessing housing in holiday areas,
Coming into effect from April 2025, this change will bring significant implications for landlords, reshaping how income and gains from FHLs are treated.
Timeline and key implications
From 6 April 2025, the FHL tax regime will be abolished for both income tax and capital gains tax purposes. After this date, any income and gains from FHL properties will be integrated into either UK or overseas property businesses, eliminating the advantageous treatment previously enjoyed by FHLs.
Current tax advantages
The existing FHL tax regime offers several compelling benefits that distinguish it from other property businesses. Let’s break these advantages down in more detail:
Mortgage interest relief
Unlike standard residential lettings, where mortgage interest relief is capped at the basic rate of tax, FHL profits can fully deduct finance costs, reducing taxable income significantly. This has been particularly attractive for highly leveraged properties.
Flexibility in profit allocation
Jointly owned FHL businesses provide spouses or civil partners with greater flexibility in allocating profits. For example, landlords can allocate more profits to the individual with a lower marginal tax rate, maximising after-tax income. This flexibility is generally not available in other property types.
Capital allowances
An FHL is not subject to the exclusion that normally prohibits a claim for plant, etc, used in ordinary residential lettings. Capital allowances may be claimed more widely.
Capital Gains Tax Reliefs
Various capital gains tax reliefs are available, that are not generally available to ‘ordinary’ letting businesses, including
- Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief);
- Rollover relief;
- Gift relief (gifts of business assets);
- Relief for loans to traders;
Pension Contributions
FHL profits qualify as “relevant earnings” for pension purposes, and can secure tax relief on potentially much higher personal pension contributions.
Will this mean higher tax costs?
Generally, the abolition of the FHL tax regime will mean higher tax costs. To illustrate these changes, I’ve written an example below:
Mr and Mrs Rigby own a furnished holiday let as joint tenants (i.e. 50:50). Mr Rigby is a higher rate taxpayer, and Mrs Rigby is a basic rate taxpayer. They receive rental income of £45,000, incur rental expenses of £15,000 and mortgage interest of £10,000 during the year.
Before 5th April 2025: their total tax liability is £4,000.
The rental profits can be allocated to Mrs Rigby to utilise her lower marginal rate of tax and mortgage interest is treated as an allowable expense under the FHL regime.
After 5th April 2025: Their total tax liability is £7,000.
The rental profits are allocated 50:50 to Mr and Mrs Rigby and mortgage interest is treated as a basic rate tax reducer (not an allowable expense).
This simple example demonstrates how the loss of profit allocation flexibility and mortgage interest relief can result in significantly higher tax costs, especially for couples with differing tax rates.
What can a landlord do to mitigate the higher tax costs?
There are numerous things a landlord could do to mitigate the higher tax costs, including:
Review Ownership Structures:
- Investigate whether transferring property ownership to a company or restructuring joint ownership can provide tax savings.
- Note that such changes may attract additional costs, including Stamp Duty Land Tax (SDLT) and Capital Gains Tax (CGT), so expert advice is crucial.
Maximise capital allowances:
- Embedded Fixtures – Conduct a thorough review of your property to identify overlooked embedded fixtures eligible for capital allowances.
- Future expenditures – Plan significant investments, such as replacing furnishings or upgrading systems, before April 2025 to claim the Annual Investment Allowance (up to £1m). These capital allowance may be deducted against current and future rental profits.
Utilise Capital Gains Tax Relief
- CGT: Gift Relief – The FHL property should be gifted before 6 April 2025 to secure gift hold-over relief.
- CGT: Rollover Relief – Sale and replacement of FHL property should be carried out before 6 April 2025 to secure replacement of business asset roll-over relief
- CGT: Business Asset Disposal Relief – Sell before 5 April 2025 and, assuming BADR conditions are met, pay 10% CGT (rather than 24% CGT). If you are unable to sell before 5 April 2025 consider ceasing the business before 5 April 2025. Providing the BADR conditions are satisfied at time of cessation, then BADR will still be available on disposal within 3 years.
Here to help
If you have Furnished Holiday Lettings in your property portfolio, get in touch with our expert property team to discuss how we can help you navigate the changes to the FHL tax regime.
