Landlords letting furnished holiday lettings (FHLs) benefit from tax advantages not available to landlords letting residential property on longer lets. However, at the Spring Budget, the Chancellor announced that the FHLs tax regime will be abolished from 6th April 2025. From that date, FHLs will be taxed in the same way as other residential lets.
Key dates
The abolition of the tax regime for FHLs will be abolished from 6th April 2025.
This update explains the present FHL tax regime and the impact of the abolition.
Advantages of the FHLs tax regime
A separate tax regime applies to FHLs. The profits or losses arising from FHLs are computed separately from those on long-term residential lets and landlords of FHLs benefit from several tax advantages.
Landlords who let properties that qualify as FHLs can deduct finance and interest costs in full when calculating their taxable profits.
They are also able to benefit from several capital gains tax reliefs that are available to traders, including business asset rollover relief and relief for gifts of business assets. Where the conditions for business asset disposal relief are met, they would benefit from the preferential 10% capital gains tax rate on qualifying gains up to the £1 million lifetime limit.
Landlords of FHLs are also able to claim capital allowances on items such as furniture, fixtures, and fittings.
Finally, the landlord’s rental profits count as earnings for pension purposes.
These advantages are not available to landlords letting residential properties that do not pass the FHLs tests.
Qualifying as a FHL
A property will only qualify as an FHL if it is in the UK or the European Economic Area. The property must be let furnished and the furniture provided must be sufficient for normal occupation and available use by guests staying in the property. The property must be let commercially to make a profit. Finally, it must pass three occupancy tests.
- To meet the pattern of occupancy test, the total of all lettings that exceed 31 continuous days must be less than 155 days in the year.
- To meet the availability condition, the property must be available for letting as furnished holiday letting accommodation for at least 210 days in the tax year,
- To meet the letting condition, the property must be let commercially as furnished holiday letting to the public for at least 105 days in the year. Lets of more than 31 days are not considered. Days when the property is used by the landlord or let to friends or relatives below a commercial rate are also excluded.
Abolition of the FHLs tax regime
The FHL tax regime is to be abolished from April 2025. For 2025/26 and later tax years, the profits from FHLs will be taxed in the same way as the profits from other residential property lets.
Landlords of FHLs paying mortgage interest and other finance costs will no longer be able to deduct these in calculating the rental profits of their unincorporated property business. Instead, relief for interest and finance cost will be given as a basic rate tax deduction, allowing landlords to deduct 20% of the costs from the tax due on the profits from their unincorporated property rental business.
The capital gains tax reliefs that are a major advantage of the current FHLs regime and the loss of these, will be a blow. Where the landlord is sitting on a large chargeable gain, consideration could be given to selling the property before 6th April 2025 to benefit from the current rules, and in particular, the preferential 10% capital gains tax rate where business asset disposal relief is available – for a higher rate taxpayer, the savings will be worth £1,400 for every £10,000 of gain. However, it is prudent to check the detailed rules once available to ensure that the disposal does not fall foul of anti-avoidance provisions. It has already been announced that anti-forestalling rules will apply to unconditional contracts entered into on or after 6th March 2024.
Landlords of FHLs who wish to make pension contributions should consider doing so before 6th April 2025. Pension contributions are capped by earnings as well as by the annual allowance. Profits from FHLs count as earnings for pension purposes; those from longer residential lets do not. Without higher earnings, pension contributions are limited to £3,600 gross (£2,880 net) each year.
Currently, losses can only be relieved against future profits from the same type of let. Once FHL and longer lets are treated in the same way, it is assumed that unrelieved losses from either stream can be relieved against the total profits from residential lets for 2025/26 onwards. However, the detailed rules are needed before this can be confirmed.
While the loss of reliefs will be a blow to landlords of FHLs, the abolition of the regime will relieve them from the pressures of meeting the occupancy tests, paving the way for longer lets during the off-season without the risk of jeopardising the property’s FHL status. This may boost income. However, it should be remembered that occupancy tests, albeit less stringent ones, must be met to bring the property within business rates rather than council tax.
You may find the following link helpful: https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim4105
Please see another An Accounting Gem blog: https://www.aag-accountants.co.uk/high-income-child-benefit-charge-2024-25-changes/
Please call us today on 01473 744700 or if you need any further help with your accounting issues.
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