The furnished holiday lettings (FHL) tax regime is set to be scrapped from April 2025, with draft legislation already on the table.
If you own a holiday home, now is the time to get familiar with these forthcoming changes and consider how they could impact your tax liability.
From April 2025, the tax incentives associated with Furnished Holiday Lets (FHLs) will no longer be available, meaning you will lose the advantages that come with the current regime.
Current tax benefits
At present, FHL owners enjoy several tax benefits, such as being able to claim up to £1 million of capital expenditure under the Annual Investment Allowance (AIA).
FHL owners may qualify for Business Asset Disposal Relief (BADR), which offers a lower tax rate compared to standard Capital Gains Tax (CGT) if their FHL activities are deemed a business.
Expenses like mortgage interest can be fully deducted from rental income, reducing taxable profits for FHLs significantly more than for non-FHL properties.
Additionally, income from FHLs is classified as earned income, making it eligible for relief at the owner’s highest Income Tax rate.
What’s changing?
When the FHL tax regime ends, the tax treatment of these properties will likely become similar to that of standard residential rentals. This will result in:
- Interest deductions capped at the basic Income Tax rate.
- Abolition of capital allowances for new expenditures, although relief for replacing domestic items will remain.
- Income no longer counting as UK earnings for pension relief purposes.
- Profit splitting for jointly owned FHLs will also cease, aligning with rules for traditional investment properties where income must be split according to ownership shares. This will remove the current flexibility FHL owners have to optimise their tax liabilities by adjusting income distribution.
What should you do next?
If you are running a FHL business or managing FHL properties, you have until April 2025 to take full advantage of the available tax reliefs. Now is the perfect time to claim capital allowances on your eligible properties if you haven’t already done so.
If you have delayed making a capital allowance claim due to cash flow concerns or a lack of urgency, it is important to act now to secure these tax benefits.
Even if your FHL business is currently running at a loss, claiming these allowances can still be a smart move. It can increase the amount of loss you report, which you can carry forward to offset against future profits.
Plus, you can review and claim allowances for past expenditures as long as your FHL business is still up and running.
Alternatively, you might want to consider selling your property, especially if you planned to do so already, as the sale could benefit from the current 10 per cent Capital Gains Tax relief under BADR.
If you own a furnished holiday let and would like to discuss how these upcoming changes may affect you, don’t hesitate to get in touch.
