Although not as widely discussed as the sweeping changes to domicile, still as important was the announcement in the Budget in March that the government intends to legislate to abolish the furnished holiday lettings (“FHL”) tax regime, thereby ending the advantageous tax benefits for FHLs starting from 6 April, 2025. 

Given the short timeframe, owners of FHLs should swiftly develop a suitable plan of action in response to these changes.

When will the furnished holiday lettings regime end?

It is proposed that from 6 April  2025 the tax regime for furnished holiday lettings will be abolished, thereby removing the tax advantages for landlords renting out short-term furnished holiday properties. These were always more advantageous rules than those relating to ‘regular’ property lettings, however the criteria for qualifying as an FHL were relatively narrow. 

Who will be affected by the FHL changes?

This change will affect owners of furnished holiday homes that are commercially let and meet the criteria to be classified as a FHL for tax purposes.

What are the existing rules for Furnished Holiday Lets?

Under existing regulations, landlords who lease properties meeting the criteria for FHL can avail themselves of certain capital gains tax relief for traders. They are also eligible for capital allowances on plant and machinery, covering items like furniture, equipment, and fixtures. Moreover, profits are considered earnings for pension purposes, and full interest costs are permitted.

To qualify as an FHL, the property must be available for letting for at least 210 days in a tax year and be actually commercially let to the public for at least 105 days in the tax year. Landlords with multiple properties can opt for an averaging election, allowing for variations in their portfolios.

If any lettings of 31 or more continuous days exceed a total of 155 days during the year, the property will not qualify as a furnished holiday let for that year.

Any days occupied by the landlord, even where they are paying a market rate of rent, are not counted under the 210 and 105 day counts above, as HMRC consider that the property is not available for let when occupied by the landlord.

What are the existing advantages for owners of FHLs?

The entire amount of finance costs, such as mortgage interest, can be subtracted from FHL income.

• When selling an FHL, business asset disposal relief might be available, resulting in a 10% capital gains tax rate.
• Profits generated from FHLs are considered relevant earnings for pension purposes, permitting tax-advantaged pension contributions.

Legislating to abolish the FHL regime

The government has proposed that it will legislate to abolish the FHL regime from April 2025. This move will eliminate the tax advantages enjoyed by FHL landlords leasing short-term furnished holiday properties. 

Why has the Chancellor abolished the FHL regime?

In his Budget in March, the Chancellor explained that the rationale behind this decision is that the government perceives the tax benefits for such properties as having come at the expense of local residents struggling to access the property market. The aim of these changes is to increase opportunities for local residents to rent such properties.

This, together with the reduction in the rate of UK capital gains tax on gains realised on the sale of residential property to 24% is clearly aimed at generating sales of residential properties (both those which fall inside and outside of the FHL regime), and boost home ownership.

Have the details of the FHL abolition been released yet?

Detailed legislation will be released later in the year, and it will be intriguing to examine the specifics. 

This legislation is expected to incorporate an anti-forestalling provision to prevent individuals from gaining a tax advantage by using unconditional contracts to secure lower rates of capital gains tax under the current FHL  rules. Essentially, this provision will remove the 10% business asset disposal relief for sales occurring on or after Budget Day, 6th March 2024.

Should you have a FHL within your portfolio and need advice tailored to your situation, please contact Anthony Roberts via hello@sanctoras.com