On July 29 2024, the Labour Party issued a policy paper announcing the abolition of the advantageous Furnished Holiday Lettings (FHL) regime, effective from 6 April 2025.
By no means a shock, the change had been anticipated since it was first presented in the 2024 Spring Budget. And it’s intended to remove the current tax advantage for landlords who let short term furnished rentals to holiday makers.
This will have a huge impact on those who run holiday let portfolios. So, it’s important to understand what the changes mean for you.
Current Benefits of FHL
Under the current regulations, FHLs enjoy several benefits compared to standard buy-to-let properties, including:
- Business Asset Disposal Relief: Gains from disposing of an FHL business qualify for this relief, reducing the capital gains tax rate to 10% on up to £1 million of gains, compared to the standard 24% rate on residential property gains.
- Capital Gains Tax Reliefs: Other reliefs, such as gift relief, allow deferral of capital gains tax on gifted FHL properties.
- Capital Allowances: FHL owners can claim capital allowances on fixed asset expenditure.
- Finance Cost Relief: Individuals can claim full relief for mortgage interest and other finance costs, unlike standard buy-to-let landlords who are restricted to basic rate (20%) relief.
What’s Changing?
It’s now been announced that from 6 April 2025 the following changes will apply:
- Business Asset Disposal Relief: This relief will only apply in limited cases where the FHL business ceases on or before 5 April 2025, and the property is disposed of within three years. Other capital gains tax reliefs will also be discontinued.
- Capital Expenditure: Capital allowances will no longer be available for expenditure incurred after April 5, 2025. Instead, this may qualify for ‘replacement of domestic items relief,’ similar to other property businesses. Existing capital allowances pools can continue to be written down without bringing a disposal value into account.
- Finance Cost Relief: Relief for finance costs will be limited to 20% for individuals owning FHLs.
- Loss Offsetting: Losses from FHLs can be offset against normal buy-to-let profits.
What Can You Do Ahead of the Changes?
Owners of FHL properties have several planning opportunities before the new rules take effect:
- Property Disposal: If you are planning on giving up your property, consider selling or gifting the property before 6 April 2025. This will mean you can still benefit from the 10% capital gains tax rate or claim gift relief.
- Ending Renting: If selling before 6 April 2025 isn’t feasible, consider ceasing to rent out the property to take advantage of the 10% tax rate on a sale within three years.
- Maximise Capital Allowances: Ensure capital allowance claims are maximised before 5 April 2025, to carry forward a large pool for offsetting future profits. It’s very much a case of use it or lose it by 5 April 2025.
- Transfer to Company: Consider transferring the FHL business into a company. Although this may trigger taxes such as stamp duty land tax, it’s important to weigh up your options with an experienced adviser here.
For more information, please contact Sarah Axe, our Private Client Tax Partner, or Ronak Shah, our Capital Allowances Director.
