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Article updated following publication of draft legislation and policy paper released Monday 29th July 2024.
Contents
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The Furnished Holiday Letting (FHL) regime provides valuable tax relief for property owners who let out furnished properties as short-term holiday accommodation. This also extends to farm tourism ventures as many agricultural businesses diversified to maintain their core trade and offer cottages as holiday accommodation with additional services such as farm tours, catering, bike hire and trekking.
This regime has offered numerous tax advantages, making it an attractive route for UK property owners. However, the March 2024 Budget announced the abolition of the FHL regime from April 2025, creating a change in dynamic. Until now, the then Government had not provided any further details on the changes leading to uncertainty and if a new Government would proceed with the proposed abolition if elected.
On Monday 29th July 2024 the Labour Government released its policy paper along with draft legislation confirming abolition of the FHL regime with effect from 6 April 2025 for individuals and 1 April 2025 for companies.
This article provides an overview of the existing FHL regime currently in place, and the implications of its abolition, and actions property owners should consider undertaking now.
Existing FHL Regime and Tax Advantages
To qualify as an FHL, a property must satisfy certain criteria. The property must be rented commercially with the intention of generating a profit in the UK or EEA. It has to be furnished adequately for normal use and the property must be available for letting to the public for a minimum of 105 days a year. Individual lets should not surpass a continuous period of 31 days to the same person.
Currently, the FHL regime offers several tax incentives:
- Income Tax and Pension Contributions - Currently, profits from FHLs are treated as earned income and relevant earnings for pension contributions, allowing individual owners to contribute to pensions and benefit from certain reliefs and allowances.
- Full Deduction for Interest Costs - Interest paid on a mortgage or loan can be deducted to reduce taxable profit.
- Allowable Expenses - Owners can claim capital allowances on furnishings, equipment and integral features of the property, reducing total taxable income.
- Capital Gains Tax (CGT) - FHL properties qualify for Business Asset Disposal Relief (BADR), potentially reducing CGT to 10% on gains if sold. They also qualify for Roll-Over Relief and Gift Hold-Over Relief which can defer a capital gain.
- Inheritance Tax (IHT) - FHL properties can qualify for Business Property Relief (BPR), providing there is sufficient business activity to demonstrate a trade, potentially reducing the value of the business for IHT purposes by up to 100%.
FHL Regime Abolished from April 2025
The Government’s decision to abolish the FHL regime is part of the initiative to ensure fairer taxation within the property rental sector. The Budget report estimated this change would raise £35 million in taxes in 2025/26 increasing to £245 million in 2028/29.
What can property owners expect from April 2025?
The main implication of dropping the FHL regime, for individuals, is the loss of tax benefits. Without the FHL regime, property owners should prepare for increased tax costs. Owners of FHL properties, going forward, will not be able to make new claims for capital allowances nor avail of interest deductions on borrowings. In addition, rental profits will not be relevant earnings for pension contributions purposes, increasing overall tax payable.
Furthermore, attractive CGT rates and reliefs will no longer be available, resulting in increased CGT liabilities on property sales and transfers. The introduction of an anti-forestalling rule applicable from 6 March 2024 prohibits tax advantages arising from the use of unconditional contracts to obtain capital gains relief under the current FHL rules. In addition, properties will no longer qualify for BPR, increasing IHT liabilities. Although HMRC have often challenged IHT relief to deny BPR claimed on an FHL business, the relief still applied in certain circumstances.
In summary, from April 2025, former FHL will form part of the individual’s UK or overseas property business and subject to the same rules as other let property businesses.
What actions can property owners take?
- Review your existing holiday let business and in particular, consider your capital allowances position - Continue to operate the business under the new, less beneficial regime. A capital allowance review should be undertaken to ensure that maximum capital allowances are claimed prior to April 2025 and transitional rules will provide that existing FHL businesses with capital allowance pools brought forward will be able to continue claiming those writing down allowances.
- Sell or pass on the rental property - Consider accelerating plans to sell or gift the property to avail of existing reliefs, such as BADR and Gift holdover relief. BADR may continue to apply to a disposal that occurs within the normal 3-year period following cessation, provided the business satisfied the FHL conditions prior to the commencement date.
- Change rental strategy - Review existing portfolio and explore the feasibility of converting holiday lets into long-term rental properties or consider other property uses to maintain pre-existing income streams. The transitional rules should be reviewed alongside any proposed change in strategy, to ensure maximum benefit is obtained.
- Seek professional advice to steer financial planning and tax strategy - Consult with tax advisers to understand the full impact of these changes and explore alternative tax planning strategies.
- Administration and compliance - Maintaining accurate records and understanding new tax requirements will be vital to ensure compliance post-abolition.
To conclude, the abolition of the FHL regime in April 2025 represents a significant reform in property taxation and the withdrawal of several tax reliefs. It is fundamental that owners of holiday lets are proactive in preparing for the absence of tax benefits and take this into consideration when adopting their rental and financial strategies.
By taking proactive steps now, consulting with professionals and staying informed about upcoming changes, property owners can navigate this transition effectively and ensure continued profitability and compliance in their property ventures.