Tax Changes For Furnished Holiday Lets
The government has issued draft legislation to abolish the special tax treatment for furnished holiday lettings from 6 April 2025 for individuals and from 1 April 2025 for corporation tax.
What is a furnished holiday let?
A Furnished Holiday Let (FHL) is a type of short-term rental accommodation that can generate property income for property owners. The tax treatment of Furnished Holiday Lettings income is currently different to, and more advantageous than, normal property income (e.g. from a long-term rental property).
To qualify as a Furnished Holiday Let property, it must be available for commercial letting, furnished, and meet specific conditions.
What’s changing?
The proposed legislation will remove the beneficial tax treatment that furnished holiday let landlords currently receive over other property businesses. In particular, for furnished holiday let property owners in 2025/26 and onwards:
- The ‘finance cost restriction rules’ will limit tax relief for finance costs (including loan interest) to the basic rate of income tax.
- Capital expenditure incurred on the property will be relieved (if eligible) utilising ‘replacement of domestic items relief’ rather than the more generous plant and machinery capital allowances rules.
- Capital gains tax relief for trading business assets will no longer be available.
- Income from furnished holiday letting activity will no longer be considered ‘relevant earnings’ for the purposes of calculating an individual’s maximum tax advantaged pension contributions.
The furnished holiday let property will simply become part of the owner’s UK or overseas property business and be subject to the same rules as residential property businesses.
Capital Gains Tax
Eligibility for capital gains tax (CGT) business asset rollover relief, business asset disposal relief, gift hold over relief, relief for loans to traders, and exemptions for disposals by companies with substantial shareholdings will cease with effect from April 2025.
Are there transitional rules for existing furnished holiday lettings?
Yes – these are outlined in detail below.
Capital Allowances
If at the end of 2024/25 tax year, the furnished holiday lettings business has a capital allowances pool of expenditure, writing-down allowances can continue to be claimed on that pool in 2025/26 and onwards. There will not be a market value balancing adjustment as the FHL property becomes part of the main property business.
As stated above, any new expenditure incurred on or after 1 or 6 April 2025 can only be relieved via the replacement of domestic items relief, if eligible.
Carried Forward Losses
If at the end of 2024/25 there are carried forward losses in the furnished holiday letting business, these will continue to be carried forward and will be available for set off against future years’ profits of the main property business (UK or overseas as appropriate).
FHLs that ceased prior to 6 April 2025 – Business Asset Disposal Relief
In relation to business asset disposal relief (BADR), where the FHL conditions are satisfied in relation to a business that ceased prior to 6 April 2025, relief may continue to apply to a disposal that occurs within the normal 3-year period following cessation.
Are there anti-forestalling rules?
Yes. There is an anti-forestalling rule that came into effect on 6 March 2024. This prevents opportunity to ‘lock-in’ the more favourable 2024/25 capital gains tax treatments (including the 10% BADR rate) by entering into a contract on or after 6 March 2024 but before 6 April 2025 and then having an actual date of conveyance or transfer on or after 6 April 2025.
This is subject to two exceptions for which a statement is required to be made with the claim. Those exceptions are:
- When the contract was entered into wholly for commercial reasons; or
- The parties to the contract are not connected persons, and in either case no purpose of the contract was to avoid the less favourable capital gains tax treatment applicable to FHL disposals after 5 April 2025.
What about VAT?
The VAT treatment of holiday lettings is unlikely to change when the FHL regime is abolished. Currently, as per the VAT Act 1994 (Schedule 9 Group 1), ‘holiday accommodation’ is standard-rated. For this purpose, ‘holiday accommodation’ is any accommodation in a building, hut, caravan, houseboat or tent that is advertised as suitable for holiday or leisure use. It is irrelevant whether the property qualifies as an FHL property.
If, however, as a result of the changes, the property owner switches to providing longer term living accommodation, the supply will become exempt.
Does this make a difference for inheritance tax?
Not directly. Even if a rental activity qualified as a FHL business for income tax and capital gains tax purposes, the venture has not necessarily qualified for Business Relief (BR) for inheritance tax purposes. As such, the full value of the FHL is usually taken into account when making lifetime transfers or as part of a death estate.
BR can reduce the value of business assets by 50% or 100% for inheritance tax purposes but BR is not due if the business consists wholly or mainly of dealing in securities, stocks and shares, dealing in land or buildings, or making or holding of investments. HMRC will generally view a FHL venture as one of mainly holding investments.
There may however be cases where the level of additional services provided is so high that the activity can be considered as non-investment, and each case needs to be treated on its own facts.
We’re here to help you.
If you would like to discuss how these changes directly affect you, please contact Natalie on:
01633 815800
