Owners of furnished holiday lets set to lose key tax benefits
The abolition of the Furnished Holiday Lettings (FHL) regime from 6 April 2025, announced at the Spring Budget, will mean that individuals operating FHL businesses will lose a number of key tax benefits.
- Currently, interest incurred on loans for the purpose of a furnished holiday letting business are treated as a deduction from rental income in calculating taxable profits of the business. From 6 April 2025, interest for businesses operated by individuals will cease to be a deduction and relief will instead be given as a 20% tax credit from the individual’s tax liability. For higher rate taxpayers, this will mean a reduction in tax relief for interest to the 20% rate.
- As trading assets, capital gains on the disposal of furnished holiday letting assets by individuals currently may qualify for business asset disposal relief: where they qualify, gains up to the lifetime limit of £1m would be taxed at a rate of 10%. As investment assets, from 6 April 2025 such gains will be subject to the CGT tax rate of 18% for profits within the standard rate band or 24% for profits within the higher rate band.
- Gains on the disposal of a furnished holiday let would currently qualify for CGT rollover relief such that, if a replacement qualifying asset is purchased, a claim can be made to deduct the capital gain from the tax base cost of the new asset, thereby deferring the tax point of the gain. Such relief is only available for investment properties in cases of compulsory purchase.
- Expenditure on qualifying assets for a furnished holiday letting business are currently eligible for capital allowances. As a letting of residential investment property, such relief will be withdrawn from 6 April 2025 although it is likely that such businesses may instead be able to claim a deduction from profits for the cost of replacing domestic items.
- Tax relief for pension contributions by individuals is currently limited to contributions of the higher of £3,600 or 100% of net relevant earnings. Currently, profits from furnished holiday lettings are treated as relevant earnings. From 6 April 2025, therefore, those individuals who rely on profits of a furnished holiday lettings business to support obtaining tax relief for their pension contributions may need to seek appropriate advice.
Commenting on the changes, Paul Falvey, tax partner at BDO said: “While owners of furnished holiday lettings are set to lose some significant tax benefits from April 2025, those who choose to sell their property after 6 April 2024 will be able to benefit from the reduction in the higher rate of CGT for residential property gains which is due to drop from 28% to 24%.
“These tax changes make it less attractive to own holiday lets and more attractive to sell them. The chancellor is clearly hoping that this will lead to significant numbers of property owners putting their holiday homes on the market in the 2024/25 tax year.”
“Whether this does lead to a significant increase in the availability of rural homes to buy or longer term residential lettings remains to be seen.”
