The previous Government's budget in March 2024 announced major changes to the current tax rules for Furnished Holiday Lettings (FHLs). The new Government intends to see these changes through, ending the favourable tax regime which has been in place for a number of years.
The FHL regime treats qualifying short-term lettings as a trade for tax purposes. The following tax benefits will be lost after 6 April 2025:
Mortgage or loan interest and other finance costs
Mortgage interest can be deducted in full from rental income, allowing income tax relief at the highest marginal tax rate of the taxpayer. From April 2025, tax relief will be given as a 20% tax credit. This means that higher (40%) and additional rate taxpayers (45%) will lose out on valuable tax relief.
Capital Gains Tax
Under current rules, FHL properties are eligible for Rollover Relief, Gift Relief, Relief for Loans to Traders, and Business Asset Disposal Relief (BADR). BADR allows the first £1 million of lifetime gains to be taxable at 10% instead of at the normal residential property rates. From 6 April 2025, the normal residential property CGT rates will apply, with FHLs no longer qualifying for BADR. This means that gains will be taxed at 18% to the extent the gain falls into the basic rate band, and at 24% thereafter, based on the current normal CGT rates today.
BADR will continue to be available when the FHL business ceased before 6 April 2025, and the business is sold within the usual three-year period following cessation.
FHLs will no longer qualify for Rollover Relief, Gift Relief or Relief for Loans to Traders after 6 April 2025.
An anti-forestalling rule is also being introduced. This will prevent the use of unconditional contracts to obtain CGT reliefs under current rules and will apply from 6 March 2024.
Pension contributions
Tax relief for pension contributions is generally limited to the higher of £3,600 or 100% of an individual's ‘net relevant earnings.' Net relevant earnings generally means income from salaries and business profits, and not income from property rentals but profits from FHLs are currently included as ‘net relevant earnings' for pension contribution purposes. This can enable relief to be claimed on pension contributions which would otherwise not be due, particularly when an individual has no other source of net relevant earnings. From 6 April 2025, FHL profits will no longer be treated as forming part of an individual's net relevant earnings.
Treatment of expenses for FHLs
FHLs can claim capital allowances on qualifying expenditure. This will cease from 6 April 2025, when relief will instead be given for the replacement of domestic items. Existing businesses with a capital allowances pools will be able to claim ongoing writing down allowances, and they will not need to bring disposal values into account when the existing FHL regime is abolished.
Jointly held property
Currently, FHL businesses don't have to follow the standard rules that apply for jointly held property and so can generally shift income between spouses easier. From 6 April 2025, where a property is held in the joint names of a husband and wife or civil partners, the income will be taxed 50:50 unless they hold unequal beneficial interests and an election has been made to HMRC to this effect. This will be a significant change for those who currently make use of this and they should seek advice swiftly to see what action they should take.
Losses
Under current rules, losses from a FHL business can only be carried forward and set against future profits from the same FHL business. When the rules change, the former FHL business will form part of any other property business and the profits and losses of that business will be amalgamated. FHL losses will therefore be available for offset against other property income:
- UK FHL losses can be offset against UK property income; and
- EEA FHL losses can be offset against other overseas property income.
Companies
The above rules take effect for companies for accounting periods beginning of or after 1 April 2025.
Where an accounting period straddles this date, it's apportioned into 2 separate accounting periods, unless this produces an unreasonable result, when an alternative just and reasonable method can be used.
As an FHL business will no longer be treated as a trade from 1 April 2025, the current Substantial Shareholdings Exemption (SSE) will cease to apply.
How can we help?
Lubbock Fine can answer any questions you may have and guide you through the changes with tailored advice and support:
- We can model the effect of the new regime to assess how the new rules will affect your business's profitability and income tax liabilities, enabling you to plan ahead.
- We can help determine whether you should sell now to claim BADR and potentially achieve a 10% tax rate. Remember, disposals must be reported to HMRC within 60 days, with the tax paid by the same deadline.
- If you're considering passing property onto your family, we can provide advice on claiming Gift Relief and ensure the transfer is effective for Inheritance Tax purposes.
- We can review whether restructuring your debt is advisable ahead of the restrictions on mortgage interest relief.
- We can advise on whether accelerating capital expenditure would be beneficial under the new rules.
- We can help you determine if continuing with a FHL business is appropriate in light of the changed tax regime, or if transitioning to longer lets would be more advantageous.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.