During the announcement of the Spring Budget 2024, we were made aware that the special tax regime for Furnished Holiday Lets (FHLs) would be abolished. This is disappointing to hear, as owners of short let properties were able to take advantage of these special tax rules.

What We Know 

No impact until 2025 tax year

• The existing tax regime will remain unchanged for the current tax year (Apr 2024 - Apr 2025)

Restriction of interest deductions

• Interest on mortgages or loans to fund FHLs will be subject to the restrictions on tax deductions for interest payments.  
• From 2025, only a basic rate tax deduction can be claimed.  This will impact higher rate taxpayers and some basic rate taxpayers who have other income and high interest costs.

Capital Allowances

• Moving forward, it is expected that the only tax relief available to FHLs will be for the replacement of ‘domestic items’. This is due to Holiday Lets being regarded as dwellings (an expected change, but not currently confirmed).
• If this change goes ahead, FHL Hosts will no longer be able to claim capital allowances on items such as furniture or items for refurbishment of their Holiday Let

Capital Gains Tax

• Abolishing the FHL regime will see the end of the availability of Business Asset Disposal Relief (BADR).
• The 10% CGT rate will no longer be available on sale of the property. The CGT rates for the sale of UK land & buildings will apply. For basic rate taxpayers, this will be 18% and 24%* for higher rate taxpayers (*4% reduction in rate announced in Spring 2024 Budget).
• It is expected that with these changes, it will include an anti-forestalling rule.  This will prevent the obtaining of a tax advantage through the use of unconditional contracts to obtain capital gains relief under the current FHL rules. This rule would apply from 6th March 2024!
• CGT can also be deferred on the sale of a holiday let or, gift relief can be claimed if you passed the property on to children or beneficiaries. These reliefs are not available to long term let properties.

Pension Contributions

• It is expected that, from April 2025, FHL Hosts will be able to make contributions to their personal pension fund to reduce tax liabilities.
• This is not available for owners of long lets.

Flexibility of Profit Sharing

• If a Host has an FHL shared with a Partner, they have the ability to change the profit-sharing ratio each year. This allows a higher profit to be allocate to the Partner with lower income, and therefore flexibility around who is taxed for profit.
• If a Host has a long let property, they have to split profit 50/50 which results in equal tax.

Business Rates

• This is not connected to tax legislation and therefore Hosts should be able to register as an FHL as before, and claim small business rates relief.

What We Don’t Know

VAT

• It is not clear whether FHLs will be outside the scope of VAT or not.
• Long lets are outside the scope of VAT.
• The Spring Budget did confirm that the turnover limit for VAT Registration will be increased from £85,000 to £90,000. 

Unclaimed Losses or Capital Allowances

• It is not clear what will happen for FHL Hosts if they have any losses or capital allowance pools remaining at the end of 2024/2025 tax year.
• In an ideal world, there would be the opportunity to transfer these balances to offset against rental profits in the 2025/2026 tax year, but there is no insight as to whether this will be allowed or not. 
  
  

Next Steps for FHL Hosts

1. It is important to remember that you are able to claim capital allowances and benefit from at least 3 years of tax relief
2. Hosts with losses can still claim them for another 2 years
3. Companies that own FHL’s will not be impacted by the restrictions on interest deductions. They can also still make pension contributions and share profits flexibly via dividends.
4. Hosts with multiple properties, high interest costs or higher rate taxpayers will unfortunately be affected the most. It is therefore important to use this time to ensure that they have claimed all tax reliefs available and consider any options to structure their business more tax efficiently.