Removal of Furnished Holiday Let Tax Treatment – What it means for you
Introduction
In the spring budget 2024 the Government announced that the Furnished Holiday Let (FHL) tax status would be abolished and this has now been confirmed by the new chancellor. From 6 April 2025 this activity will be taxed in the same way as other property lets, including those on an Assured Shorthold Tenancy (AST).
Whilst this change can be summarised as the removal of tax breaks for holiday letting it remains the case that this route can generate much higher returns after tax than letting a property for a longer term.
This note explores what the change in tax rules will mean for our clients.
What could an FHL owner do that someone with an AST couldn’t?
• Claim capital allowances for new equipment or fixtures and fittings
• Deduct mortgage interest at their marginal rate
• Pay pension contributions out of the profits
• Give the property away without paying Capital Gains Tax
• Sell the property and pay a reduced rate of 10% Capital Gains Tax.
• Recover VAT on costs
Loss of Capital Allowances
Capital Allowances are a set of rules which allow for the purchase of some equipment to be deducted from taxable profits for the year. This is unlikely to have much of an impact for established holiday lets but will be very relevant for those in the early years of holiday letting or those looking to get started in the future.
Later replacements of equipment and furnishings still obtain tax relief via replacement of domestic items relief.
Businesses with an unclaimed pool of Capital Allowances will be able to claim writing down allowances at 18% or 6% per year.
Loss of interest relief
Since 6 April 2017 those with residential lets have seen their relief for mortgage interest restricted. From 6 April 2025 those with borrowings against their furnished holiday lets will see their interest relief capped at 20% of the cost.
This restriction can have very significant impacts on the tax payable for those with large borrowing or other sources of income.
Example
Fred converted an unused barn into two large holiday lets on his farm, taking out a loan of £500,000. Interest is now payable at 7% on this loan.
| 2024/25 | 2025/26 | |
| £ | £ | |
| Farming profits | 55,000 | 55,000 |
| Holiday let profit before interest | 40,000 | 40,000 |
| Interest deduction | (35,000) | - |
| Taxable profits | 60,000 | 95,000 |
| Tax payable | 11,472 | 25,472 |
| Interest relief @ 20% | - | (7,000) |
| Tax payable | 11,472 | 18,472 |
If Fred or his partner was claiming Child Benefit, he would have to repay this in full in 2025/26 as his income exceeds the £80,000 limit.
Loss of pensionable earnings
In recent years pensions have become more attractive due to the tax relief available on contributions and relief from Inheritance Tax when an undrawn pension is left to the next generation.
From 6 April 2025 onwards, income from holiday letting will not count as earnings for pension purposes. This restriction will impact those whose only source of income is from property but those with other sources of trading income such as a farming partnership will still be able to make contributions out of these profits.
Loss of Capital Gains Tax Reliefs
Capital Gains Tax reliefs are mostly relevant for those looking to give property away as in these situations no cash is available to pay the tax.
Until 5 April 2025, a property which has always been occupied for holiday letting can be given away tax-free if the gain is heldover. Under a holdover claim the original base cost passes to the new owner of the property, this relief is restricted if cash is changing hands.
In other situations, perhaps where the property has been previously let on an AST then the tax payable on the gain could be reduced to 10% using Business Asset Disposal Relief.
From 6 April 2025 neither of these options will be available and Capital Gains Tax will be payable at 18% or 24% on the sale or gift of a holiday let. It is also possible that these rates could increase in future.
It is worth considering making gifts or sales before 5 April 2025 to take advantage of these reliefs where appropriate, please note that there will be rules preventing relief where the transaction is not completed by 5 April 2025.
Income Tax losses
Currently losses from holiday letting can only be offset against future profits from holiday letting. From 6 April 2025 any losses brought forward can be offset against total property income including AST's.
This will be helpful for those with multiple sources of rental income. However the losses will not be able to be offset against farming profits so those with only one property may still see their losses restricted.
VAT status
VAT and income tax are not linked so the abolition of the FHL income tax status will not affect the VAT position.
It will remain the case that short term lets will be vatable, therefore if total income exceeds £90,000 a holiday letting business will still need to register for VAT.
Once registered VAT will be recoverable on the costs but is usually payable for profitable businesses.
Impact for companies
If a company is running a holiday letting business then from 6 April 2025 this income will be treated as property letting income rather than trading income. This does not affect the rate of tax payable on the profits.
The sections above regarding Capital Allowances, Rollover Relief and VAT apply equally to companies.
However, a company would not be subject to the restriction for interest relief, if you have significant holiday letting with large borrowing attached you may wish to consider transferring this to a company before 5 April 2025 and taking advantage of any Capital Gains Tax relief which may be available.
Disclaimer: The information contained in this note is of a general nature and is not a substitute for professional advice. Please speak to us to obtain specific professional advice before you take any action. No responsibility for loss to any person acting or refraining from action as a result of this note is accepted.
Posted on 31st July 2024 by Joe Attwood.