From April, significant changes to the UK's Furnished Holiday Lettings (FHL) tax regime will come into effect, impacting property owners who let out short-term holiday accommodation. These reforms aim to align the tax treatment of short-term holiday rentals with that of traditional long-term residential lettings. Here's an overview of the key changes:

1. Mortgage Interest Relief

• Current System: Owners of FHL properties can currently deduct mortgage interest payments directly from their rental income, effectively reducing their taxable profits.

• Post-April 2025: This relief will be restricted to a 20% tax credit, regardless of the owner's income tax bracket. Consequently, higher and additional rate taxpayers, who previously benefited from 40% or 45% relief, will face increased tax liabilities.

2. Capital Gains Tax (CGT) on Property Disposal

• Current System: Profits from selling an FHL may qualify for Business Asset Disposal Relief, taxing gains at 10% for the first £1 million of lifetime gains. Additionally, owners can defer gains by reinvesting in new business assets.

• Post-April 2025: These benefits will be abolished. The standard residential property CGT rates—currently 18% for basic rate taxpayers and 28% for higher rate taxpayers—will apply, and the option to roll over gains into new assets will be eliminated.

3. Capital Allowances and Allowable Expenses

• Current System: FHL businesses can claim capital allowances on fixtures, fittings, and integral features like heating and electrical systems.

• Post-April 2025: This provision will be removed. Owners will only be able to deduct the cost of replacing domestic items against rental income, aligning FHLs with standard residential property rules. Existing capital allowance pools can be carried forward, but no new claims will be permitted under the previous regime.

4. Pension Contribution Calculations

• Current System: Income from FHLs counts towards the amount individuals can contribute to their pensions with tax relief.

• Post-April 2025: Holiday let income will no longer count towards pension contribution allowances, potentially limiting the amount that can be contributed to pensions and affecting National Insurance contributions.

5. Replacement Relief

• Current System: Replacing domestic items, furniture, bathrooms, kitchens etc can be claimed as a capital allowance.

• Post-April 2025: Replacement items can be claimed as a revenue expense - caution is advised when replacing items with significantly upgraded versions as this might be considered as an improvement rather than a repair.

Implications for Property Owners

These changes represent a significant shift in the taxation of short-term holiday lets. Property owners should review their portfolios and seek professional tax advice to understand the full implications of these reforms and to explore potential strategies for mitigating increased tax liabilities.

We are excited to announce that Pass the Keys have joined forces with industry experts, Zeal Tax. Zeal specialises in helping short-term let owners unlock tax savings in self-catering properties, unlocking millions of pounds in tax savings for property owners over the past decade, through capital allowances.

Book your FREE consultation with Zeal here: Pass the Keys-Zeal Tax