Clarification on tax changes to Furnished Holiday Lets

Draft legislation and associated guidance has now been published on tax changes affecting the owners of furnished holiday let accommodation.

The letting of furnished holiday accommodation has historically offered taxpayers significant tax breaks so the announcement of the withdrawal of those tax advantages in the Spring Budget was a surprise to many landlords who are operating Furnished Holiday Let (‘FHL’) businesses.

From 5 April 2025 the following will be withdrawn:

• The counting of profits as ‘net relevant earnings’ for pension contributions
• The availability of Rollover, Gift Relief, Business Asset Disposal Relief in relation to capital gains arising on the disposal of FHLs
• Capital Allowances on the acquisition of qualifying plant, fixtures and fittings and integral features
• The deduction of finance costs (such as mortgage interest) directly from gross profits

In practice this means:

Capital Allowances

It will be possible to claim capital allowances on qualifying expenditure incurred up to 5 April 2025 but beyond that, the tax treatment will be aligned with that which already applies to longer term lettings under Assured Leasehold Tenancies.

The apportionment of a significant proportion of outlay on kitchens and bathrooms, for example, will no longer attract allowances and any free-standing items normally classified as plant will fall within the ‘replacement of domestic items’ rules. Any existing pooled expenditure can continue to be written down until extinguished, with no further additions post 5 April 2025.

Rollover Relief

If a qualifying Furnished Holiday Let is sold before 6 April 2025, rollover relief will continue to apply, if proceeds are rolled into another qualifying asset within the requisite time limits. Upon disposal of that new asset after 5 April 2025, the deferred gain will be charged to tax with no option of claiming further rollover relief.

It is worth noting that any gains that have been ‘rolled over’ into assets that are still held at the date of death will not be charged to tax, with the new asset achieving the usual uplift to probate value.

Business Asset Disposal Relief (BADR)

If a let property meets the conditions to be categorised as a FHL for the two years prior to sale, BADR will apply, meaning that the landlord will pay a rate of 10% on the ensuing capital gain, as opposed to 24% for non-FHL qualifying lets.

The ability to claim BADR continues for sales triggered before 6 April 2025, with the exchange of contracts being the trigger point for Capital Gains tax purposes.

However, where an FHL business ceases by 5 April 2025, a landlord will have three years in which to dispose of any properties and claim BADR on the first £1,000,000 gains, subject to having their full BADR allowance available. If cessation occurs after 5 April 2025, the option to claim BADR within three years is lost.

Losses & Restricted Finance Costs

Any losses brought forward at the date of the change of rules will be amalgamated with existing non-FHL property letting losses.

Finance costs, such as mortgage interest, will no longer be deducted from gross rents. Landlords may wish to consider their current financing arrangements in view of this. For example, an additional rate taxpayer deducting £10,000 from their £30,000 gross rents would currently receive tax relief of £4,500. From 6 April 2025, this will be restricted to £2,000.

Our advice

We would advise landlords who haven’t yet considered how the rule changes will affect them to review their situation now, in light of the draft legislation and further guidance issued and to take action according to the longer-term wealth plans they have.

If you are a landlord and require advice on any aspect of property taxation, please contact us today and a member of our team will be happy to help you.