Furnished Holiday Lettings tax regime

At the Spring Budget 2024 it was announced that the special tax rules for furnished holiday lettings (FHLs) will be abolished from 6 April 2025. On 29 July, the new Labour government released a policy paper which sets out the proposed changes for inclusion in Finance Bill 2024-25.

Until 6 April 2025, a property that qualifies as a FHL can benefit from various tax reliefs that aren’t generally available to rental property businesses. Here are some of the key factors to consider if you have an existing FHL property.

What is a FHL?

To qualify as a FHL, a property must be based in the UK or the European Economic Area (EEA), furnished and let on a commercial basis, and the following conditions need to be met:

1. The property must be available for letting for 210 days a year.
2. It must actually be let for 105 days a year (the let days test).
3. The property must not normally be let for periods of more than 31 consecutive days to the same person, but if it is, those let days don’t count towards the number of let days in point two above.
4. The total of all lettings which exceed 31 days also can’t exceed 155 days.

There are two elections that can be made to reach the let days test. Where more than one FHL property is let in a year, an averaging election can be made to average the occupancy for all the properties that are let as FHLs. Alternatively, if a property meets the letting condition in some years but not others, a period of grace election can be made.

Furnished holiday let changes

If a property qualifies as a FHL following the proposed changes, many of the tax reliefs currently available will be removed.

Income tax

April 2017 introduced rules restricting the amount of income tax relief available for the finance costs of a let property. Up to 5 April 2025, these restrictions do not apply to FHLs, and so full relief can be obtained for finance costs. From 6 April 2025 onwards, former FHLs will be treated in the same way as residential let property and the same finance cost restrictions will apply.

Capital allowances, which reduce the taxable profits of a FHL, are currently available against the cost of providing furniture and equipment such as cookers, washing machines and beds. Where the property is used for private purposes, the allowances are restricted to reflect the private use. From 6 April 2025, any new expenditure will no longer qualify for capital allowances, instead landlords can in certain circumstances claim ‘replacement of domestic items’ relief’. Where there is an unrelieved capital allowance ‘pool’ at 5 April 2025, capital allowances can continue to be claimed until the pool is fully relieved.

Profits from a FHL are currently treated as earned income for the purposes of pension contributions, which is particularly useful for an individual with limited other earnings. This will also be removed from 6 April 2025.

If you own your FHL jointly, under the current rules the way in which you divide your profits does not have to follow the ownership split ie if one person carries out more of the work in relation to the property, they can be allocated more of the profits. From 6 April 2025 however, the profits must be split in the same way as residential let property. The default for jointly owned property is 50/50 irrespective of the actual ownership split. This can be altered, however advice should be sought on the correct way of doing so and the tax implications.

Capital gains tax (CGT)

For CGT purposes, the following reliefs are currently available in relation to FHLs:

• Business Asset Disposal Relief – the gain on a disposal of a FHL may be charged to CGT at 10%,
• Rollover relief – the gain on another qualifying asset may be rolled into the purchase of a FHL, or the gain on the disposal of a FHL may be rolled into the purchase of another qualifying asset, and
• Business asset gift relief – the gain on the gift of a FHL can be held over for CGT purposes.

The rules regarding the availability of each of these reliefs are complex and may be restricted if the conditions for each aren’t satisfied. From 6 April 2025 these reliefs will no longer be available, however some limited transitional rules apply.

It is worth noting that an anti-forestalling rule will apply to prevent the use of unconditional contracts to obtain CGT reliefs under the current FHL rules and that rule applies from 6 March 2024.

Inheritance tax (IHT)

The proposal is silent on IHT, however if FHLs are to be treated as part of a property business going forward it could be assumed that this will remove any ability to claim BPR on a FHL business in the future.

Other issues

Losses

Losses are currently ring-fenced and set against profits of other FHL profits, with UK FHLs and EEA FHLs being treated as separate businesses.

As a result, if a UK FHL makes a net profit and a separate EEA FHL business a loss, the loss cannot be utilised against the profit.

From 6 April 2025, former FHL properties will form part of a person’s UK or overseas property business and that property business will then include the amalgamated profits and losses of all the properties in that business.

If you have brought forward losses from your FHL business, under the new rules you can continue to carry these forward to be offset against future years profits of either your UK or overseas property business, as appropriate.

VAT

If you’re already a VAT-registered person, or are required to be VAT-registered, VAT will need to be accounted for on FHL income.

If VAT hasn’t been charged and accounted for when it should have been, HMRC will consider the fees collected to be VAT-inclusive.

For VAT purposes, the provision of holiday accommodation (including Airbnb style lets) is subject to VAT regardless of whether the property qualifies as an FHL for other tax purposes, or not.  The income received from supplies of holiday accommodation forms part of a trader’s taxable turnover, and is therefore relevant when determining whether a liability to register for VAT has arisen and will arise in the future.

How we can help

There have been advantages to letting a property as a FHL but, as the rules change care will be needed to ensure current tax reliefs are maximised and the transition to reporting in line with other property income and gains is done correctly.

For help with any of the issues raised here, please speak to your usual Saffery contact, or get in touch with Zena Hanks.

There are further proposed changes which will apply where your FHL is chargeable to corporation tax rather than income tax. These are not covered by this article, but we can advise on this if required.