Furnished Holiday Lets – Where are we now?

With significant changes to the Furnished Holiday Let (FHL) regime coming into effect in April 2025, owners of holiday rental properties face crucial decisions about their tax position and business structure.

What are the key upcoming changes to FHL?

The favourable tax treatment for FHLs is being abolished, meaning they will be treated the same as other rental properties for tax purposes.

Key changes include:

• Loss of capital allowances – From 6 April 2025, FHL owners will no longer be able to claim capital allowances on furniture and fixtures. Instead, relief may be available under the ‘replacement of domestic items’ rule, subject to conditions. However, any spending on capital allowances up to this date can be claimed, so if you are planning any spending of this nature, you may wish to bring this forward. Any existing capital allowances pooled will be carried forward, and you will be able to continue to claim writing down allowances on that pool.
• Treatment of losses – From 6 April 2025, losses will be treated as general rental losses, offsetable against any rental income in the same business. If you have any brought forward FHL losses, these can be carried forward against future profits of the rental. Some property owners may benefit from the upcoming changes. Those with a mix of long-term rental and FHL properties, along with unused FHL losses, will be able to offset these losses against other property income starting in 2025/26.
• FHLs and pension contributions – Prior to April 2025, FHL profits could be treated as relevant earnings for the purpose of pension contributions. However, this will no longer be the case.
• Changes to Capital Gains Tax (CGT) – FHLs currently qualify as trading assets which mean they may qualify for Business Asset Disposal Relief (BADR), which allows CGT at 10 per cent on disposals up to £1 million. From April 2025, the normal CGT rules apply (currently 18/24 per cent). Rollover relief and holdover relief (see below) are also no longer going to apply to FHL properties.

Capital gains issues

BADR will no longer be available on FHL businesses. However, if your business ceases before 5
April 2025, and the BADR rules apply at that date, you then have three years to sell in which time you could still qualify for BADR (10 per cent increasing to 14 per cent from 6^th April 2025).

Rollover relief and holdover relief are currently available to FHL property but will no longer apply from 6^th April 2025.

Holdover relief allows properties to be gifted to, say, family members without a gain arising and it may be worth thinking about doing this before the rules change. However, if the property has not been used as a FHL throughout ownership, gains may still arise. There are also inheritance tax implications of such transactions.

Rollover relief can apply where a qualifying property is sold, and the money reinvested in a new qualifying asset. Whilst FHL will no longer be qualifying assets, properties such as guest houses or commercial property for use in your own trading business might qualify.

With all of these, there are pitfalls and as such it is important to seek professional guidance.

How do the changes affect VAT and expenses?

The current VAT rules are not changing. Holiday accommodation, whether previously qualifying as an FHL or not, will continue to be standard-rated for VAT.

The rule changes do not affect how general expenses can be claimed.

Revenue expenses, such as utilities, repairs, toiletries, and cleaning products, can still be deducted as before.

Finance and mortgage interest costs

After the repeal, the way finance costs are treated will change.

Individual landlords will still be able to obtain relief for mortgage and finance interest costs, but this will be restricted to the basic rate of Income Tax (20 per cent), in line with the existing rules for other residential landlords.

However, companies are not subject to the finance cost restriction rules, making incorporation a potentially attractive option for some landlords.

Should you operate through a limited company?

Many FHL owners are now considering whether incorporating their business would be beneficial.

Operating through a limited company can offer advantages, including:

• Lower tax rates – The main Corporation Tax rate is currently 25 per cent, or 19 per cent for businesses with profits under £50,000. This can be a more favourable option compared to personal tax rates, especially for higher earners who may face rates of up to 45 per cent.
• Flexibility in income extraction – Profits can be retained in the company to defer higher personal tax liabilities.
• Business rates planning – Structuring property ownership through multiple companies can potentially reduce liability for VAT and small business rates relief.

However, incorporation also has its downsides, including increased administrative work such as annual filings and Corporation Tax returns.

Moving an existing property into a limited company may trigger CGT and Stamp Duty Land Tax liabilities, reducing the potential tax benefits.

Consideration should also be made regarding the mortgage if you are looking at moving to a limited company.

You should seek professional advice to weigh the benefits and drawbacks of operating through a limited company to understand if incorporation will suit your needs.

What should you do now?

If you own a FHL, it is important to consider your options before the rules change in April 2025:

• Selling the property – If you were planning to sell, doing so before April 2025 could allow you to benefit from the lower 10 per cent CGT rate rather than the new 24 per cent rate. However, be aware that anti-forestalling measures are in place to prevent taxpayers from locking in the lower rate, meaning certain pre-April disposals could still be caught by the higher tax, so speak with us now to avoid unexpected charges.
• Gifting as part of succession planning – If you intend to pass the property to family, it may be worth considering gifting it now while gift holdover relief is still available.
• Reviewing ownership structures – If you own the property jointly, be aware that after 6 April 2025, rental income will generally follow ownership shares. Spouses and civil partners are automatically taxed on an equal 50/50 split. However, if property is held as tenants in common there is the option to complete a trust deed and file Form 17 with HMRC to declare actual ownership proportions. This must not be signed and sent before 6 April 2025 as it is not applicable whilst still under the FHL rules. This option is not available for those holding property as joint tenants.
• Capital Allowances – if you need to make any new purchases for the property, it would be tax efficient to do this prior to 5^th
  April 2025.

With the abolition of the FHL regime potentially leading to higher tax liabilities, it’s strongly recommended to seek professional advice to understand the best course of action.

Sharla Dandy

If you would like to discuss how these changes may impact you and explore your options, please get in touch.