Changes announced in the Spring Budget remove specific tax benefits on Furnished Holiday Lets (FHLs).
The loss of tax benefits means that those who own a FHL may want to consider taking action before 5 April 2025, when the new legislation comes into effect.
What qualifies as a furnished holiday let
To qualify as a furnished holiday let, your property must meet the following criteria:
- Your property must be furnished – The rules are not explicit to what extent your property must be furnished, but it is advisable to have everything you’d expect from self-catering accommodation.
- Intended to make a profit – The property must be let commercially with the intent of making a profit. You do not have to make a profit, it is the intention that is key.
- Be available to let:
- Be available to let for 210 days.
- Be let commercially as a holiday property for 105 days.
- If occupied by the same person or group for more than 31 days, the total duration of these longer lettings must not exceed 155 days throughout the year.
Current tax advantages of running a furnished holiday let
- Mortgage interest relief
Mortgage interest can be deducted from the profits of FHLs.
- Capital allowances
You can claim specific capital allowances on holiday lets, unlike typical buy-to-lets. These include costs for refurbishing, upgrading, and furnishing the property to a luxury standard, potentially increasing your profit.
These allowances can be offset against income, reducing your tax and increasing your retained profit.
- Pension contributions
Income gained from a furnished holiday let is classed as Net Relevant Earnings (NRE), allowing you to make tax-advantaged pension contributions.
What are the key changes to tax on furnished holiday lets?
The Furnished Holiday Letting regime classifies qualifying residential short-term lettings as a trade for specific tax purposes. When this regime is abolished, owners will lose the following tax benefits:
- Mortgage interest
Starting April 2025, relief will be provided as a 20 per cent tax credit for higher and additional rate taxpayers, reducing the previous tax relief rates from 40 per cent and 45 per cent, respectively.
- Capital Gains Tax
Capital Gains Tax on disposal of FHLs may currently qualify for Business Asset Disposal Relief (BADR), where the first one million of lifetime gains are taxed at 10 per cent. Alternatively, the gain can be ‘rolled over’ on purchases of certain new business assets.
From April 2025, the normal residential property CGT tax rate – currently 24 per cent – will apply, and the ‘rollover’ of gains will no longer be possible. This is a hard deadline, there are no transitional rules, no matter how long an FHL has been operating as a business.
- Pension contributions
Tax relief on pension contributions is capped at the greater of £3,600 or 100 per cent of net ‘relevant earnings’. Starting in April 2025, Furnished Holiday Lettings (FHL) profits will no longer be considered relevant earnings for claiming tax relief on pension contributions or for Class 2 and voluntary Class 3 National Insurance Contributions (NIC).
What should I do if I own a furnished holiday let?
Firstly, it is important to consider whether your property satisfies the criteria for being a FHL.
If the current arrangements work well for you, there might be no need to make any changes. However, it’s still wise to review how much additional tax you might need to pay in future tax years.
If you’re uncertain about keeping the property, it’s important to understand the financial implications of the recent tax rule changes for FHLs and to explore your options.
Consider selling the property before 6 April, 2025, to potentially benefit from Business Asset Disposal Relief (10 per cent tax rate). Even if it doesn’t qualify, the top tax rate is now 24 per cent.
However, the annual gains exemption has decreased, so seek tax advice before proceeding.
Capital gains must be reported and taxed within 60 days of completion.
Get in touch with one of our team for tailored advice on what to do with your FHL.
