Individuals who receive income from FHLs currently enjoy a number of tax benefits. These include:  

  1. Ability to claim capital allowances on white goods 
  1. Income counts as relevant earnings for when assessing scope for pension contributions  
  1. Mortgage interest costs can be deducted in full  
  1. Capital gains tax reliefs such a business asset disposal relief, rollover relief and holder relief  

 

In the March 2024 budget, the Government announced the abolition of the Furnished Holiday Let (FHL)  regime. This takes effect from 6th April 2025. This change will remove the tax advantages mentioned above and aligns the rules with the treatment of ordinary property income.  

 

Capital Allowances 

Individuals with FHL properties will no longer be eligible for capital allowances and instead will receive ‘replacement of domestic items relief’ in line with other property businesses. This means that in order to claim tax relief, the new item must be a ‘like for like’ equivalent of the old item. It is important to note however, that where an existing FHL business has a balance in their capital allowances pool, they will not lose relief on this. Writing down allowances can continue to be claimed on items in that pool.  

 

Income Tax 

Under the current rules, FHL owners can fully deduct finance costs (e.g., mortgage interest) against their rental income. The change in rules means that finance costs cannot be offset against property income. Instead, relief is given by way of a basic rate tax deduction. Those with high interest mortgages are likely to see a significant increase in their tax liability as a result.   

 

Currently, FHL profits from a jointly owned property can be split between spouses in the most desirable way, for example where one spouse spent more time on the running of the business, they could be allocated a greater share of the profit. Going forward, any profits from a jointly owned property must be split 50:50. This could see a significant increase in the household tax liability where one spouse is a basic rate taxpayer but the other a higher rate taxpayer.  

 

Capital Gains Tax 

Once the changes are implemented, there will be no capital gains tax reliefs available on the sale of FHL properties. However, where FHL conditions are satisfied for a business that ceased prior to the introduction of these new rules, Business Asset Disposal Relief may continue to apply provided the disposal occurs within the normal 3-year period following cessation.  

 

Losses 

One advantage of the change in FHL rules is in relation to losses. Under current rules, losses generated by a FHL business can only be carried forward and offset against future profits of that same business. However, under the new rules, these losses will be amalgamated with other property losses and carried forward to offset against any property income. This is beneficial where an individual has some properties that are FHLs and some that are long term lets.  

 

If you currently own a FHL, we would urge you to consider the following prior to 6th April 2025:  

  1. Whether you can accelerate any capital expenditure (plant/machinery/fixtures/fittings) to ensure 100% capital allowances can be claimed 
  1. Depending on your other income, the income you receive from the FHL could be key to determining the maximum you can contribute to a private pension and receive tax relief. Consider whether you should make a pension contribution before 6th April 2025. 
  1. Where properties are owned jointly between spouses but income not currently split 50:50 due to income tax bands, consider transferring into a sole name, making use of the spousal exemption for CGT. 
  1. Whilst it may be tempting to sell the property now to obtain capital gains tax reliefs, the Government have introduced anti-forestalling rules to prevent tax advantages through the use of unconditional contracts. This would apply where a contract to sell the property is made between March 2024 and April 2025 (in order to obtain CGT relief) but the transfer does not complete until after 6th April 2025.  

 

We would advise you to consult with your contact at Drummond Laurie before making any decisions regarding the sale of your FHL as the best option will be specific to your individual circumstances. If you have any queries on the upcoming changes, please do not hesitate to contact us.