Furnished holiday lettings tax regime – what you need to know

There has been an important change proposed, affecting any landlords who own properties as furnished holiday lets – the furnished holiday lettings tax regime is being abolished.

Legislation drafted by HMRC, which is due to come into effect in April 2025, applies to Income Tax and Capital Gains Tax (from 6th April 2025) and Corporation Tax (from 1st April 2025).

The changes remove tax advantages that furnished holiday let owners have over other property landlords. Originally announced by the last Government, the new Labour regime plans to adopt the changes.

So, what is a furnished holiday let?

A furnished holiday let (or FHL) is a type of short-term rental property, which must be in the UK or European Economic Area, furnished, and let out to make a commercial profit.

It must be available for at least 210 days a year and actually let for at least half of that time (105 days).

Currently, and until the changes come in next April, the full amount of the owner’s finance costs (e.g. mortgage interest) are tax deductible from their income.

Business Asset Disposal Relief (BADR) may be available when the FHL is sold, which results in a 10% Capital Gains Tax rate applying.

Profits from FHLs count as relevant earnings for pension purposes, and capital allowances on items such as furniture, fixtures and fittings can be claimed against the rental income.

The Government wants to remove the FHL tax breaks to make the rules more equitable with other residential property landlords, who offer longer-term let. It believes the change will give people more opportunities to live in their local area.

• Income Tax: loan interest will be restricted to the basic rate for Income Tax. This means there may be more tax to pay. Also, income from the rental will no longer count as relevant earnings for pension purposes, so the amount an FHL owner can contribute to their pensions and receive tax relief on may be reduced.
• Capital allowances: rules for new expenditure will be removed and replaced with the domestic items relief available to other property businesses. This could cause an increase in the overall tax payable.
• Capital Gains Tax: reliefs based on disposing of a business asset will no longer apply to furnished holiday lets. This means, the property will be taxable at the residential property rates of 18% (basic rate) and 24% (higher rate).

There are some specific transitional rules that will apply to these changes.

If you own properties that currently qualify for the furnished holiday tax regime, we suggest you get in touch with our tax team as soon as possible, to review what the changes will make to your tax position.

You may consider selling properties, because losing the tax advantages may mean they are no longer the best investment for you. If so, we have a solicitor-led conveyancing team, who can help you with all the property law related to your sale. Visit https://www.optps.co.uk/ or email [email protected].