Furnished Holiday Lets – Tax Changes Ahead

This also extends to farm tourism ventures as many agricultural businesses diversified to maintain their core trade and offer cottages as holiday accommodation with additional services such as farm tours, catering, bike hire and trekking. 

This regime has offered numerous tax advantages, making it an attractive route for UK landlords. However, with the 2024 Budget announcing the abolition of the FHL regime from April 2025, this creates a change in dynamic. This article provides an overview of the existing FHL regime, the implications of its abolition, and the actions property owners should consider taking.

Existing FHL Regime and Tax Advantages

To qualify as an FHL, a property must satisfy certain criteria. The property must be rented commercially with the intention of generating a profit in the UK or EEA. It has to be furnished adequately for normal use and the property must be available for letting to the public for a minimum of 105 days a year. Individual lets should not surpass a continuous period of 31 days to the same person.

As it stands, the FHL regime offers several tax incentives:

• Income Tax and Pension Contributions - Currently, profits from FHLs are treated as earned income and relevant earnings for pension contributions, allowing owners to contribute to pensions and benefit from certain reliefs and allowances.
• Full Deduction for Interest Costs - Interest paid on a mortgage or loan can be deducted to reduce taxable profit.
• Allowable Expenses - Owners can claim capital allowances on furnishings, equipment and integral features of the property, reducing total taxable income.
• Capital Gains Tax (CGT) - FHL properties qualify for Business Asset Disposal Relief, potentially reducing CGT to 10% on gains if sold. They also qualify for Roll-Over Relief and Gift Hold-Over Relief which can defer a capital gain. 
• Inheritance Tax (IHT) - FHL properties can qualify for Business Property Relief (BPR), providing there is sufficient business activity to demonstrate a trade, potentially reducing the value of the business for IHT purposes by up to 100%.

Budget 2024 Plan to Abolish the Regime from April 2025

The UK Budget 2024 announced the abolition of the FHL regime, effective from April 2025. This decision is part of the government's initiative to ensure fairer taxation within the property rental sector. The Budget report estimated this change would raise £35 million in taxes in 2025/26 increasing to £245 million in 2028/29. However, currently there is no further guidance nor draft legislation available, creating uncertainty for taxpayers. With the General Election imminent, it remains to be seen whether the newly elected government will proceed or not with abolition of the FHL regime.

What can property owners expect?

The main implication of dropping the FHL regime is the loss of tax benefits.  Without the FHL regime, property owners should prepare for increased tax costs. Owners of FHL properties, going forward, will not be able to claim capital allowances nor interest deductions on borrowings. In addition, rental profits will not be relevant earnings for pension contributions purposes, increasing overall tax payable.  Furthermore, attractive CGT rates and reliefs will no longer be available, resulting in increased CGT liabilities on property sales and transfers. In addition, properties will no longer qualify for BPR, increasing IHT liabilities. Although HMRC have often challenged IHT relief to deny BPR claimed on an FHL business, the relief can still apply in certain circumstances.

What actions can property owners take?

• Review your existing holiday let business - Continue to operate the business as is with the tax advantages removed going forward.
• Sell or pass on the rental property - Consider accelerating plans to sell or gift the property to avail of existing reliefs, such as Business Asset Disposal Relief and Gift holdover relief.
• Change rental strategy - Review existing portfolio and explore the feasibility of converting holiday lets into long-term rental properties or consider other property uses to maintain pre-existing income streams. 
• Seek professional advice to steer financial planning and tax strategy - Consult with tax advisers to understand the full impact of these changes and explore alternative tax planning strategies. 
• Administration and compliance - Maintaining accurate records and understanding new tax requirements will be vital to ensure compliance post-abolition. Property owners should stay up to date with any further guidance from HMRC regarding the transition from the FHL regime.

To conclude, the abolition of the FHL regime represents a significant reform in property taxation and the withdrawal of several tax reliefs. The absence of transitional guidelines creates uncertainty for property owners who need to adapt to the forthcoming changes.

Therefore, it is fundamental that owners of holiday lets are proactive in preparing for the absence of tax benefits and take this into consideration when adopting their rental and financial strategies. By taking proactive steps, consulting with professionals and staying informed about upcoming changes, property owners can navigate this transition effectively and ensure continued profitability and compliance in their property ventures.