UK: Changes to the Furnished Holiday Lettings tax regime

From 6 April 2025, the specific tax treatment for FHLs will be abolished. As a result, properties that were previously classified as FHLs will be taxed in the same manner as other residential rental properties. This marks the end of the distinct tax advantages that have been available to FHL owners.

Loss of Key Tax Benefits

1.    Capital Gains Tax (CGT)Reliefs:

·      Business Asset Disposal Relief (BADR):Currently, FHL disposals may qualify for BADR if certain conditions are met, reducing the tax rate on gains to 10%. From April 2025, this relief will no longer be available for FHLs, and gains will be taxed at the standard residential property rates of 18% and 24%, depending on the Basic Rate Band availability.

·    Rollover Relief: This relief, which allows the deferral of CGT when the proceeds from the disposal of an FHL are reinvested in another FHL, will no longer be available.

·    Gift Hold-Over Relief: The ability to defer CGT when gifting an FHL property is already limited by transitional provisions, but from April 2025, this option will be further restricted, with some potential usage through trusts.

2.    Interest Deduction:

Interest on loans used to purchase FHLs will no longer be fully deductible from rental income. Instead, tax relief on interest will be restricted to a 20% deduction against the tax liability, which significantly reduces the level of relief available to Higher Rate and Additional Rate Taxpayers.

3.  Capital Allowances:

FHL owners will no longer be able to claim capital allowances for new fixtures attached to buildings (such as air conditioning) and new furnishings. However, relief will still be available for replacement furnishings.

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4.  Pension Contributions:

The income from letting FHLs will no longer  be classified as pensionable earnings, potentially reducing the amount of pension contributions eligible for tax relief.

Strategic  Considerations for FHL Owners

Given these forthcoming changes, owners of FHL properties should consider seeking professional advice. Key actions may include:

·       Property Sale: Assess  whether to sell FHL properties before 6 April 2025 to take advantage of the current tax benefits.

·       Joint Ownership: For owners of jointly owned FHLs where income is not split equally, it may be necessary to seek advice to manage future income distribution.

The  abolition of FHL-specific tax treatments from April 2025 will have significant implications for property owners. Proactive planning and consultation with tax professionals are essential to navigate these changes effectively.

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