The Labour government may have announced the recent changes to the Furnished Holiday Let (FHL) tax regime, but this shift has been in motion since the previous government began pushing for reform. The goal is straightforward: to align FHL tax rules with the broader regulations governing rental property income. While these changes, set to take effect in April 2025, will bring significant adjustments for those invested in holiday lets, there’s still plenty of time to take advantage of the current system—and prepare for what’s next.
Overview of the FHL tax regime
Before we look at the changes, it’s important to recognise the current FHL tax regime and what it means to those operating such businesses.
Criteria for an FHL
The criteria are relatively simple: to qualify as an FHL, the property must be:-
- Furnished
- Based in the UK or the European Economic Area
- Available for at least 210 days of the year
- Let for at least 105 days of the year
In addition:-
- The property cannot have the same occupier for more than 31 days
- The homeowner must not be considered an “occupier.”
All FHLs in the UK and EEA states are considered businesses for tax purposes, even if the properties are held in the owner’s name.
Tax advantages of an FHL
The FHL tax regime has attracted controversy in the past, even though the sector is very different from traditional buy-to-let property. Before the changes, owners of FHLs were able to claim tax relief on:-
- Finance costs
- Energy and gas bills
- Insurances and repairs
- Personal travel to and from the property
- Accountancy fees
There was also the opportunity to:-
- Offset the purchase of furniture, equipment and fixtures against capital allowances
- Count income from an FHL towards your annual pension allowance
- Benefit from capital gains tax relief (entrepreneurs, business asset rollover and gift relief)
For example, an FHL owner upgrading their property with a £20,000 kitchen renovation could previously offset the cost against their taxable income. From April 2025, they will lose this advantage, making such investments less tax-efficient.
Tax disadvantages of an FHL
While the FHL regime offers attractive benefits, it’s not without its challenges. Let’s take a look at some potential drawbacks, which include:-
- The need to register for VAT on turnover of more than £90,000 (previously £85,000) per annum
- Excess wear and tear on the property due to a higher turnover of tenants
- Losses can only be offset against the same FHL, as each one is treated as a separate entity
- Additional and ongoing administrative work required to achieve the qualifying criteria
When it comes to the VAT threshold, it’s important to note that, for a self-employed individual, the combined turnover of their business and FHL interests counts towards their vatable income.
Under UK income tax regulations, profits from FHLs are treated as part of a property business, although there are significant tax benefits. From April 2025, the tax treatment of profits will be exactly the same as that of a typical property business.
Looking at the broader picture, it’s not difficult to see why FHLs have been popular with property investors, farmers, and second homeowners. How the forthcoming tax changes will impact this sector remains to be seen. Would a general increase in running costs suggest an increase in letting rates?
What are the main changes from April 2025?
While some of the changes from April 2025 onwards may seem minor, they could considerably impact the cost of running an FHL and personal finances. The traditional benefits of holding an income-producing asset within a business remain untouched, but for FHLs, there are significant changes to accommodate.
Removal of capital allowances
Currently, FHL owners can offset the cost of, for example, a new kitchen against a capital allowance, but this will not be allowed in the future. However, you will still be able to offset the cost of a replacement kitchen (on a like-for-like basis) and other costs, such as upgrading from single-glazed windows to double-glazed windows. This is because this type of expenditure is not seen as a capital cost, i.e. improvement to the property, but as a repair cost.
Restrictions on loan interest relief
Similar to personal mortgage interest relief, loan interest relief will only be available at the basic rate of income tax from April 2025.
End of business asset reliefs
While FHLs historically qualified for business asset disposal and rollover relief, this will not be the case under the new tax regime.
Changes to relevant earnings
Like income earned by a business, income from an FHL won’t qualify as relevant earnings for pension contributions under future regulations. This is more significant than some people might appreciate!
Succession planning changes
The removal of gift holdover relief will force many to review their future succession plans concerning FHLs.
Transition rules and deadlines
Typically, there is a window of opportunity between the announcement of tax changes and their implementation. Regarding the FHL changes, the majority will not come in until April 2025. However, the government has introduced an anti-forestalling rule to prevent owners of FHLs from benefiting from early property sales. This rule became effective on 6 March 2024, the budget day, when future changes were confirmed.
There are still some helpful transition rules and deadlines, which include:-
- Maximising capital allowances for historic property expenditure
- Review succession plans
- Assess how this may impact your pension contributions
Whatever your situation, you should still seek professional advice to maximise the remaining benefits.
Don’t discount the FHL sector
There is no doubt that the loss of various capital allowances and reliefs, compared to traditional property businesses, is a blow to the FHL market. However, it’s important to maintain sight of the underlying attractions post-April 2025. These include:-
- Simplified tax reporting – this could reduce administration and professional costs
- Capital gains potential – supply issues could increase the capital value of remaining FHLs
- Stable rental income – the home holiday market is expected to remain strong
- Flexibility – potential to switch between short, medium and long-term rentals
Those reading the recent press comment on FHL changes could be forgiven for assuming this is the beginning of the end for FHLs. This is not the case.
As we have seen repeatedly, investment markets adapt to change in a way that maximises long-term income and capital appreciation. There is still potential for long-term capital gain, and the benefits of stable rental income should not be dismissed when it comes to FHs. Property and FHLs also provide an element of diversification for investment portfolios.
Conclusion
Historically, the generous tax benefits of holding FHLs in your own name, where they’re treated as business assets, led many investors to skip building formal business structures for their portfolios. However, with the upcoming changes, this landscape is set to shift. The new tax regime might prompt many FHL owners to rethink their strategy and consider transitioning to a more formal business structure.
Beyond addressing the immediate tax implications, it’s crucial for FHL owners to understand how the changes will affect their long-term income and tax liabilities. Now is the time to evaluate future strategies and make informed decisions about restructuring portfolios to minimise impact.
We’re here to guide you every step of the way – whether you need advice on navigating the upcoming changes or support in restructuring your assets for future success. Don’t wait until it’s too late – reach out today, and let’s work together to protect and grow your business in this evolving landscape.