As we discussed in a previous blog, significant changes are coming to the tax treatment of Furnished Holiday Lettings (FHLs). These changes will align FHL taxation with the rules for other residential property businesses, bringing an end to several key tax benefits. Our Tax Manager, Nickie Antley-Slater provides an update for property owners below.
What tax advantages are being removed for owners of furnished holiday lets?
The repeal of the special tax treatment will have a notable impact on FHL property owners, who have previously benefited from favourable tax rules. The new legislation will remove tax advantages in four critical areas:
- Loan interest will now be restricted to the basic rate of Income Tax under the finance cost restriction rules.
- Capital allowances for new expenditure will no longer be available, with relief provided only when domestic items are replaced.
- Access to reliefs from taxes on chargeable gains for trading business assets, such as Business Asset Disposal Relief (formerly Entrepreneurs’ Relief), will cease.
- Income from FHLs will no longer count towards relevant UK earnings when calculating maximum pension relief.
Following this abolishment, former FHL properties will be taxed as part of a person's UK or overseas property business, subject to the same rules as residential property businesses.
Transitional rules for existing FHL businesses
While the changes may seem sudden, there are transitional rules designed to help property owners adjust. Businesses with existing capital allowances pools can continue to claim writing-down allowances on that expenditure. However, any new expenditure incurred from the operative date will need to comply with standard property business rules.
From 2025 onwards, profits and losses from former FHL properties will be amalgamated into the overall property business, whether UK or overseas. Notably, losses generated by the FHL business can be carried forward and offset against future profits of the property business.
Impact on capital gains tax (CGT) reliefs
For property owners considering disposals, it's essential to understand the changes to CGT reliefs. Eligibility for Business Asset Disposal Relief, roll-over relief, gift relief, and exemptions for company disposals will end in 2025. However, for disposals of businesses that ceased before 6th April 2025, Business Asset Disposal Relief may still apply if the sale occurs within three years of cessation.
An anti-forestalling rule will also come into effect from 6th March 2024, aimed at preventing tax advantages from being claimed through unconditional contracts under the current FHL rules. Please ensure you speak to us for advice on a case-by-case basis before taking any action.
What should property owners of Furnished Holiday Lets do next?
With these changes on the horizon, strategic planning will be crucial. Property owners may want to review their portfolios to assess the potential impact, explore investment opportunities before the new rules take effect, or consider selling properties to take advantage of the existing CGT reliefs.
Speak to the property tax team at LWA
If you own FHL properties and need advice on how these changes might affect your tax position, get in touch with our Corporate and Personal Tax team. We can help you evaluate your options and prepare for the upcoming reforms, ensuring you’re in the best possible position before the deadline.
Our expert team has vast experience in supporting residential and commercial property owners and landlords, can help you prepare for the changes by:
- Reviewing your current FHL property portfolio and assess the potential impact of the new tax rules.
- Advising on the timing of any planned sales of your FHL properties to take advantage of the current CGT reliefs before they are abolished.
- Evaluating the benefits of making significant capital investments in your properties before the Annual Investment Allowance changes.
Please contact our Tax Manager, Nickie Antley-Slater via mail@lwaltd.com (including ‘FHL tax changes’ in the subject field) or call us on 0161 905 1801 in Manchester or 01925 830 830 in Warrington.