The 2024 Spring Budget included the announcement that furnished holiday let (FHL) status will be abolished from April 2025. So what are the implications for FHL business owners who decide to continue their business – as well as those who want to sell up?
FHL status – recap
When a letting business qualifies as an FHL, it does not amount to a trade, but a number of tax breaks apply that do not apply to a general letting business. These are:
- business asset disposal relief (BADR) can apply on a disposal of the business;
- holdover and rollover relief can be claimed;
- finance costs can be deducted in full;
- plant and machinery capital allowances can be claimed;
- profits can be strategically allocated to co-owners easily;
- profits count as relevant earnings for the purpose of working out the pension annual allowance.
The abolition of the FHL status means that these breaks will be lost, but although this will not be effective until 2025, an anti-forestalling rule has been announced. This will prevent the obtaining of a tax advantage through the use of unconditional contracts to obtain capital gains relief under the current FHL rules. This rule applies from 6 March 2024, the date of the budget.
The detail on this rule is still awaited, so there is currently uncertainty about whether capital gains reliefs on disposal will apply.
Continue to let
Perhaps the most significant change to a continuing business will be the restriction of relief for financing costs (particularly mortgage interest). Instead, relief is given as a reduction at the basic rate, restricted to 20% on the lesser of:
- the finance costs; or
- the rental profit; or
- the owner’s adjusted total income
The effect of this change should not be underestimated. At worst, as has been the case with landlords generally, it could mean that a tax liability arises even though the letting business has made a loss in cash terms. The following example illustrates this.
Before and After
Jane is a higher-rate taxpayer with a salary of £70,000. She lets seaside cottages as a qualifying FHL. The income in 2024–25 is £20,000. There are allowable expenses (excluding financing costs) of £9,000. However, Jane also pays interest of £12,000 on two loans used to purchase and improve the properties. For 2024–25, the interest is a deductible expense, meaning Jane has a loss of £1,000. While losses from FHLs can no longer be offset against general income, there is no tax to pay on the FHL income.
How this will change in 2025–26?
Assuming the figures are the same, the profits before taking into account financing costs are £11,000 (we’re ignoring the £1,000 loss from the previous year as we want a like-for-like comparison). This time, the tax reduction is restricted to the lesser of 20% of:
- the interest: £12,000 × 20% = £2,400; and
- the rental profits: £11,000 × 20% = £2,200.
We do not need to consider her ANI here, as her salary less personal allowance will clearly be more than of either of the amounts above. So, Jane will need to pay tax at 40% on £11,000, i.e. £4,400, less £2,200 = £2,200, even though the business results in cash terms is a £1,000 loss.
Note that only £11,000 of the interest paid has been used to work out the tax reducer here. The remaining £1,000 can be carried forward to augment the relievable amount at the basic rate in the next tax year. The position is even more complicated where there are losses, and it will be important for owners to keep clear records, especially when MTD ITSA rolls out for landlords from 2026. This will obviously have less impact on owners whose properties have a relatively low debt burden.
Capital Allowances
It will also be crucial for Jane to appreciate that plant and machinery allowances will no longer be available. Instead, the more restrictive relief for replacing domestic items will need to be claimed.
It is not currently clear what will happen in 2025 where capital allowances have previously been claimed, or losses that have been calculated including deductions of financing costs – i.e. whether any reworking will need to be done.
Effect on Pensions Allowance
The other thing to consider is whether the exclusion of FHL profits will have an impact on the pension annual allowance. This could affect individuals in two ways:
- where other income is relatively modest, FHL profits may have increased the annual allowance, which is the lower of £60,000 and ‘relevant earnings’, so it will be important to keep this in mind when planning contributions;
- where other income is relatively high, FHL profits may have previously brought the individual into the tapering rules. This may no longer be the case.
Selling up
It is no secret that a number of the Budget measures relating to property were intended as a nudge to encourage sales of second properties. The year window in abolishing the FHL status gives owners a chance to reflect and still take advantage of CGT breaks (subject to the anti-forestalling rules not yet set out).
If owners decide that the changes are objectionable enough to warrant a cessation of the business, it will be important to ensure entitlement to BADR is secured. As the business is unincorporated, the trigger will be the cessation of the business activity. The business assets (the properties) can then be sold and qualify as associated disposals within three years.
As there is no detail yet of any transitional provisions that may be available, it will be essential that the cessation takes place in the 2024–25 tax year, and that the FHL status applies for the two-year period ending with the cessation date. It is not clear how this might apply in the context of the abolition of the FHL status. It may be that the current rule that the qualifying criteria must be met in the final 12 months of business will apply.
However, it is possible that particular rules could be introduced, e.g. that a cessation in 2024–25 will qualify as long as the business qualified in the previous two tax years.
If you have any questions on how this topic affects you, get in touch on 01902 711370 or email enquiries@uklandlordtax.co.uk.
