Clarification on tax changes to Furnished Holiday Lets – Effective as of April 2025

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

The following comments relate to individual’s but can also apply to companies. 

The letting of furnished holiday accommodation has historically offered taxpayers significant tax breaks which are being withdrawn with effect from 6 April 2025. This comes as a surprise to many landlords who are operating Furnished Holiday Let (‘FHL’) businesses. 

From 6 April 2025 the following will be withdrawn:

• The counting of profits as ‘net relevant earnings’ for pension contributions 
• 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 
• The availability of Rollover, Gift Relief, Business Asset Disposal Relief in relation to capital gains arising on the disposal of FHLs. In this connection HMRC have clarified their anti-forestalling rules in the new tax legislation by commenting that where a contract for sale has been made on or after 6 March 2024 and the disposal takes place on or after 6 April 2025 then favourable CGT reliefs will not be available unless either: 

1. • The purpose of entering into the contract was other than to avoid the changes in the abolition of the FHL regime 
   • The contract was entered into by unconnected parties wholly for commercial reasons 

In practice this means:

Capital Allowances (“CA”)

It will be possible to claim capital allowances on newly qualifying expenditure incurred up to April 2025 but thereafter, individuals and companies will be able to claim only the annual writing down allowance until the pool has been exhausted. Landlords are advised to purchase before 6 April 2025 to bank the CA claim. 

The apportionment of a significant proportion of outlay on kitchens and bathrooms, for example, after that date, will no longer attract allowances and any free-standing items normally classified as plant will fall within the ‘replacement of domestic items’ rules.  

Jointly owned property

HMRC have confirmed that, after 6 April 2025, married couples or couples in a civil partnership will be taxed 50/50 on the rental profits arising unless they enter into an election for a different split by use of form 17. This is contrary to the current rules which permit a split according to the unequal shares in the property. Our advice is that if landlords prefer a split which is other than 50/50 then a form 17 election should be arranged and submitted to HMRC prior to 5 April 2025. 

FHL’s commencing in tax year 2024/25

HMRC have confirmed that where an FHL business commences in the tax year 2024/25 the qualifying occupancy conditions that need to be satisfied will commence on the first day when letting commences and extend to a 12-month period which will end after 6 April 2025. 

Rollover Relief

If a qualifying FHL 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. As with all the other (previously) favourable CGT reliefs, HMRC have confirmed that cessations of business mean actual cessations and will not be enforced on ‘deemed’ cessations simply because of this curtailment of favourable FHL treatment. ‘Actual’ cessations refer to ‘no more bookings thereafter.’ 

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 an 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. 

Furthermore, if you ran a qualifying FHL business up until 5 April 2025 for a period of at least 2 years and sell the relevant property by 5 April 2028, you may still qualify for BADR subject to your lifetime allowance of maximum £1,000,000.   

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 

VAT

Regardless of whether or not the lettings satisfied the qualifying occupancy conditions, the lettings are standard rated for VAT purposes.  

Our advice

We would advise landlords who have not yet considered how the rule changes will affect them to review their situation now, in light of the new 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.