If you own or are looking to invest in a Furnished Holiday Let (FHL) it's important to familiarise yourself with the upcoming changes. Announced in the Spring budget 2024, these new rules will come into effect from April 2025. The government is making these changes to promote longer-term residential letting by removing the favourable tax benefits currently available to FHLs. With the draft legislation being published, here's what you need to know and consider before these changes are implemented.
Key Changes to FHL taxes
Mortgage interest
From April 2025 holiday let owners will lose mortgage interest tax relief, meaning mortgage interest can no longer be fully deducted from your rental income. Relief will instead be provided as a 20% tax credit against your income tax bill.
Capital Gains Tax (CGT) on selling your FHL
Currently you may be able to qualify for Business asset Disposal Relief (BADR) on disposing of FHLs, where all gains on selling qualifying assets are taxed at 10% up to a lifetime limit of £1m. From April 2025 any sale will be taxed at the standard residential property CGT rate, currently 24% (for higher rate taxpayers), additionally the ability to defer (or “roll over”) gains by reinvesting in new business assets and hold- over relief will also be removed.
Deductions for furnishings etc.
Currently FHLs are treated as a trade, allowing them to claim capital allowances on the costs of items such as fixtures, fittings and integral features of the building. From April 2025 you'll only be able to deduct the cost of replacing domestic items, and no new capital allowances can be claimed.
- Key tax planning consideration: The government have confirmed any existing capital allowances pools will be carried forward, allowing you to continue to claim writing-down allowances on those pools. It's advisable to accelerate any capital allowance-qualifying expenditure before 6 April 2025. If you run a FHL business, reach out to us to see how a capital allowance claim can help your tax position.
Pension Contributions
From April 2025, FHL income will no longer count as “relevant earnings” for pension contributions. This will impact the amount of tax-free contributions that can be made by holiday let owners planning their retirements.
Profit allocation
Currently profits can be split between multiple owners rather flexibly, for example, the tax burden can be reduced significantly by distributing income to lower-earning partners. This benefit will be removed in April 2025, potentially impacting some owners by pushing them into higher tax brackets and increasing their liability.
Should you take action?
If your holiday let qualifies as an FHL consulting with an expert tax advisor can be essential to help you save money. If you would like help in understanding the rule changes and review any potential impact, they may have on you and your family, please contact our team for personalised advice and support.
In summary, the upcoming changes mean that FHLs will no longer have the tax advantages they once did. It's important to review your situation, consider the financial impact, and seek advice to make the best decision for your circumstances before April 2025.