Abolition of the Furnished Holiday Letting (FHL) Regime
The tax treatment of income received from a FHL business is changing from 6 April 2025. The changes will mean that the same tax rules apply to FHL businesses and other lettings.
The implications for the owner of a FHL business are as follows:
Property Ownership
Until 5 April 2025 it is possible for the joint owners of a FHL business to decide how they want to allocate profits/losses. However, from 6 April 2025 the beneficial ownership of the underlying property is relevant, and all property owned jointly by a married couple will be regarded as being held on a 50:50 basis. When unequal beneficial interests are held in a property (say 75:25), letting income received from the property will be taxed on a 50:50 basis unless an election (form 17) is made for the property income to be taxed in line with the beneficial ownership.
It may be necessary to speak to a solicitor and arrange for the underlying beneficial ownership in a property to be changed before 6 April 2025, bearing in mind that this may have Land and Buildings Transaction Tax implications. An election will then need to be submitted to HMRC confirming the split before 5 June 2025.
Capital Allowances
Capital allowances may continue to be claimed on expenditure incurred in a FHL business before 5 April 2025. However, from 6 April 2025, it will not be possible to claim capital allowances on new qualifying expenditure in a FHL business, and ‘replacement of domestic items relief’ will apply to all letting businesses. Business owners may want to consider bringing forward new qualifying expenditure to before 5 April 2025.
One Property Business and Losses
Where an individual owns a holiday letting property and a long term let property, from 6 April 2025 they will be treated as having one UK property business that includes income and expenditure on both properties.
The net rental profit (or loss) for each individual property will then need to be added together to produce an overall assessable amount for each tax year. Losses carried forward from one property will automatically be offset against income arising in future years in all the properties held.
Loan Interest Relief
Loan interest payments made on a holiday letting property will no longer be claimable as a deduction from rental income. Loan interest relief will instead be restricted to the basic rate of income tax. This means that less tax relief will be available to higher and additional rate taxpayers.
Pensions/National Insurance Contributions
From 6 April 2025, profits from a FHL business will no longer be regarded as ‘relevant earnings’ for the purposes of claiming income tax relief on pension contributions or for class2/class 3 NICs.
Capital Gains Tax Reliefs
From 6 April 2025, when a FHL business is sold it will no longer be considered the disposal of a business asset for capital gains tax purposes. This means that Business Asset Disposal Relief, Business Asset Rollover Relief and Business Gift Relief will no longer be available.
If the owner of a FHL business is considering a sale in 2025, it would make send to bring forward the sale to before 5 April 2025. If this is not possible, a gift to a family member may be an option for some.
If you are the owner of a FHL business and are looking for advice on tax implications of the April 2025 changes, please get in touch!
