Furnished Holiday Lets to End in April 2025

Mar 20, 2024

In his budget on 6th March, Chancellor Jeremy Hunt announced the end of the Furnished Holiday Letting Regime. The stated aim was to make more homes available to local people, particularly in holiday hotspots. So what does this mean for landlords with FHLs? 

The abolition of the furnished holiday lettings (FHL) regime will mean that individuals operating FHL businesses will lose several key tax benefits. The implications will undoubtedly affect any landlord with a mortgage and in our opinion will see a shift to ownership in a limited company to avoid interest relief restriction under section 24, particularly for higher rate taxpayers.

How much Revenue will the measure raise?

Looking at the statement of impact provided by the government the announcement which is expected to affect the holiday letting industry and its estimated 50,000 jobs, is estimated to raise £35m in 2025/26, increasing to £245m in 2028/29.

What about mortgage interest

Currently, interest incurred on loans for the purpose of a furnished holiday letting business is 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 with standard residential lettings on assured Shorthold Tenancies, this interest relief restriction has led to nearly 50% of all new BTL purchases being made through a limited company. We expect the same thing to now happen for any new FHL’s purchases. Tax relief on mortgage interest in a limited company is still allowed as a full deduction against rental income.

The Effect on Capital Gains Tax

As investment assets, from 6 April 2025, such gains will be subject to the Capital gains tax (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, 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 is 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.

What about pension contributions?

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 the profits of a furnished holiday lettings business to support obtaining tax relief for their pension contributions may need to seek appropriate advice.

Summing up

Whilst 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 in personal ownership and some operators may now use the reduction in the higher rate CGT to sell up.

We also expect that some landlords may wish to explore the possibility of a transfer of the FHL to a limited company. However, we caution that advice be taken beforehand to establish any CGT and SDLT costs this may entail.

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. Even with the mortgage restriction a FHL let if run well and with decent levels of occupation will still outperform a standard BTL, so why would a landlord sell or convert to long-term lettings?

If you are concerned about the impact of the removal of the FHL regime, get in touch. We can discuss the options available to you and help structure your portfolio in a tax-efficient way, please feel free to reach out to us on 01902 711370 or email enquiries@uklandlordtax.co.uk.

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