The abolition of Furnished Holiday Lettings Relief: A turning point for holiday let owners

In a bid to promote fairness back into the property let sector, plans to abolish the Furnished Holiday Let (‘FHL’) tax regime from April 2025 was announced by the former Conservative government.

It certainly did not come as a surprise that the new Labour government confirmed that they would continue with the abolition of the FHL tax regime. On 29 July 2024, both draft legislation and policy guidance was published by the government, laying out the trajectory for the proposed measures and what this specifically means for FHL owners.

Current rules

The current rules provide beneficial tax treatment for FHLs, compared to long term property rental businesses. This essentially allows FHL landlords to treat them as businesses rather than investment, enabling beneficial tax breaks for expenses, as well as access to the 10% Business Asset Disposal Relief rate when it comes to disposal of the business, provided certain conditions are met.

Changes

From 6 April 2025 (1 April 2025 for companies), the FHLs rules will be scrapped and subject to the same rules as ordinary property businesses. After the changes, former FHL properties will be simplified and form part of an ordinary property business, with any profits and losses amalgamated into existing UK or overseas property businesses.

The key changes that are being implemented are:

• Finance cost restriction exemption removal

Currently FHLs obtain an exemption from finance cost restriction rules, which restrict loan interest to the basic rate of Income Tax for other landlords.

From April 2025, FHLs owned personally will no longer be able to deduct the full interest on loans from their rental income and relief will be restricted to basic rate income tax.

Where FHLs are held within a corporate wrapper, these will continue to benefit from full interest expensing under corporation tax rules.

• Capital Allowances removal

FHL owners are currently able to claim capital allowances on items such as equipment, furniture, and other fixtures within the property. These allowances reduced taxable profits by allowing a deduction for expenditure on the initial outlay and replacement of items, due to wear and tear.

In comparison, capital allowances are not available for ordinary residential properties landlords, who are only entitled to relief on the replacement of domestic items.

From April 2025, businesses with FHL properties will no longer be eligible for capital allowances treatment but will instead be eligible for ‘replacement of domestic items relief’, which is in line with other property businesses.

Transitional rules

Where landlords have already claimed capital allowances under the FHL regime, transitional rules are being introduced so that balancing charges do not arise on the cessation of FHL status. In addition, FHL businesses with a capital allowance pool can continue to claim relief on that pool.

Although, any new expenditure purchased after the relevant date will be considered under the property business rules.

• Capital Gains Tax (CGT) reliefs removal

Under current rules FHL properties are eligible for advantageous reliefs on chargeable gains for trading business assets, including Business Asset Disposal Relief (BADR), Rollover Relief, Gift Relief, relief for loans to traders, as well as exemptions for disposals by companies with substantial shareholdings.

After the changes, eligibility for these reliefs will cease.

Transitional rules

Transitional rules for Business Asset Disposal Relief (BADR) will be available for property disposals that occur within the normal three-year period following cessation of the FHL business, provided the FHL conditions are satisfied in relation to the business ceasing prior to the commencement date (1 April/6 April 2025).

• Exclusion from relevant UK earnings for pension purposes

The amount a person can contribute towards their pension is limited to the maximum of £3,600 (gross) or their UK relevant earnings, such as employment/self-employment earnings.

Profits arising from the FHL business count towards UK relevant earnings for pension purposes, so allows FHL landlords to contribute towards a personal pension where they do not have sufficient UK earnings elsewhere.

From April 2025, profits will no longer qualify as UK relevant earnings.

• Jointly Owned Property

Joint owners of a FHL can currently choose how to split profits, whether this is in reference to a person’s beneficial interest in the property, the actual work done in letting the property or other reasonable means. This includes married couples or civil partners.

From April 2025, profits arising from FHL business will be treated in line with ordinary property businesses. This means married couples and civil partners who own property jointly will become automatically regarded as entitled to income from the property in equal shares.

• Loss relief - transitional rules

Currently, losses generated from an FHL business can only be carried forward and utilised against the future profits of that same FHL business.

Any outstanding losses from April 2025 will be permitted to be carried forward and available to offset against future years’ profits of ordinary property business.

Going forward, losses arising from former FHLs will be subject to the same loss regime as ordinary rental properties.

VAT

Whilst residential letting income is exempt from VAT, holiday accommodation income may be subject to VAT, regardless of the FHL tax status. There has been no suggestion that these rules will change.

The abolishment of the FHL relief marks the end of these valuable tax benefits, which will likely lead to significant financial and strategic reassessments for property owners and investors. Without these advantages, the profitability of furnished holiday lets may decrease, prompting some investors to reconsider their involvement in the sector.