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Draft legislation has been published, marking the end of the tax advantages associated with Furnished Holiday Lettings (FHL’s).
In the Spring budget, the then chancellor, Jeremy Hunt, announced the repeal of the special rules which apply for Furnished Holiday Lettings (FHL). Draft legislation was promised but then a new government came into power, and we were left, somewhat in limbo, waiting for more understanding.
On 29th July 2024 the government issued the long-anticipated draft legislation and this article summaries the main points to be aware of:
Currently, if your letting qualifies as a FHL you can reduce your profits by any mortgage interest paid on the property. From 6 April 2025, tax relief will be capped at a maximum of 20%, therefore higher rate taxpayers will feel their profit margins decrease.
Currently, FHLs qualify for several reliefs from Capital Gains Tax under the following circumstances:
o When a FHL property is gifted, Gift Relief can be claimed to defer the gain from charge until the recipient of the gift sells the asset, if they ever do.
o When a FHL property is sold and the business ceases, Business Asset Disposal Relief (BADR) can be claimed on gains up to £1,000,000 which reduces the rate of tax from 24% to 10%.
o When a FHL property is sold and reinvested in another qualifying asset Rollover Relief ‘ROR’ can be claimed, which defers the gain from charge until the replacement asset is sold.
From 6 April 2025 none of these reliefs will be available for FHL properties. If you are considering gifting, selling, or ceasing your business, then it is vitally important to get professional advice as soon as possible. The timing of events could be extremely costly if you don’t get it right.
A FHL business is currently classed as a ‘trade’, as opposed to residential letting which is classed as ‘investment activity’. When there is a trade, certain capital expenditure qualifies for ‘Capital Allowances’ which will often be at 100%, giving full relief. From 6 April 2025, FHL activity will cease to be a trade so no Capital Allowances will be available.
There were concerns that all allowances previously claimed would be brought back into charge, however, the draft legislation clarifies that will not be the case. Instead, no new capital items can be added to the pool from 6 April 2025 however the pool balance, if there is one, will continue with annual writing down allowances.
Instead of Capital Allowances, any furnishings in properties will only attract tax relief when they are replaced, which is how residential lettings are treated currently.
Taxpayers should be bringing forward the timing of any planned capital expenditure, if possible.
FHL profits are currently treated as ‘net relevant earnings’ for pension contributions. This is important when considering tax relief on your pension contributions as is capped at the higher of 100% of net relevant earnings, or £3,600. From April 2025 the FHL profits will be just like any other investment income for pension purposes, reducing qualifying pension contributions to £3,600 per annum for many.
It would be wise to review your pension provisions with your financial advisor and utilise any allowance for tax deductible contributions whilst you can.
Whilst the FHL ‘trade’ is deemed to cease next April, any losses that have accumulated are thankfully not lost. Losses can be carried forward and set off against profits from other let properties owned, whether they be residential lettings or holiday lettings, however UK properties and overseas properties are kept separate.
To conclude, the tax advantages available for operating a Furnished Holiday letting will cease from April 2025 and if this will affect you, you should be seeking advice about whether you need to take any action now, before it is too late.
