Abolition of Furnished Holiday Lettings Tax Regime: Key Changes and Transitional Rules

2nd August 2024

The UK government has announced draft legislation for the abolition of the Furnished Holiday Lettings (FHL) tax regime, effective from April 2025, as outlined in the Spring Budget 2024. This change marks a significant shift in how income and gains from these properties will be taxed, aiming to align the treatment with other property businesses.

Key Changes from 06 April 2025

Capital Allowances: Under the current FHL regime, landlords benefit from capital allowances, including the ability to claim writing-down allowances on qualifying expenditure. Post-abolition, this preferential treatment will end. Instead, landlords can claim ‘replacement of domestic items relief,’ akin to other property businesses. Any capital allowances pool existing at the time of the change can still be used, but no new claims can be initiated under the FHL rules after the transition.

Business Asset Disposal Relief (BADR): Previously, FHL businesses could access reliefs like BADR (formerly Entrepreneurs’ Relief), which reduces the rate of Capital Gains Tax on qualifying business disposals. This advantage will be removed, impacting those planning to sell their FHL properties.

Income Tax Reliefs and Mortgage Interest Relief: The abolition of the FHL tax regime will significantly impact how mortgage interest is treated. Currently, FHL owners can deduct mortgage interest costs fully from their taxable rental income, this compares with standard residential landlords, who are able only to attract a 20% tax credit. Post-abolition, FHL properties will be subject to the same restriction, reducing the amount of deductible interest and potentially increasing tax liabilities for property owners.

Losses incurred will be able to be utilised against profits from a broader property portfolio, both UK and overseas.

Transitional Rules

The government has provided specific transitional rules to ease the transition:

  1. Continuation of Existing Capital Allowances: During the transition period, existing FHLs may still be able to claim capital allowances on expenditures made before the new rules take effect. However, these claims will be subject to stricter scrutiny. Property owners should carefully assess any planned purchases or upgrades, as the window for claiming full allowances is closing. This transitional phase allows for some flexibility, but it emphasises the need for timely and strategic financial planning.
  2. Losses: Losses carried forward from the FHL business will be available for set-off against future property business profits.
  3. Anti-forestalling Provisions: To prevent the manipulation of tax advantages, an anti-forestalling rule has been introduced, effective from March 6, 2024. This rule prevents the use of unconditional contracts to gain tax relief under the current FHL rules.

Please talk to your usual contact at Thompson Jenner to find out how we can help with the changes.

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