Changes to tax rules for furnished holiday lets

In March’s Spring Budget the government said it would abolish the special tax arrangements for furnished holiday lettings (FHL). The changes take effect from April 2025. 

 

Owners of furnished holiday properties who let them short-term currently have tax advantages compared to longer term residential property lets. In 2022 the Office of Tax Simplification (OTS) put forward some options to change property letting tax rules. These included ending the special FHL arrangements although they included some tax benefits for certain types of property businesses. 

 

Here’s an overview of the current position and what these changes could mean if they apply to you. 

To qualify, FHL properties must be available as commercial holiday accommodation for the public for at least 210 days in 12 months (usually the tax year). 

 

If you currently have properties you use as FHLs you can offset interest on loans against your taxable profits. You can also benefit from capital allowances for the fixtures in your property and some capital gains tax reliefs. You can also treat profits from FHLs as relevant earnings for your pension. If you jointly own FHLs as a couple the automatic 50/50 split of your income for tax purposes doesn’t apply. 

 

These rules were put in place in the early 1980s. At the time it wasn’t’ clear whether a short term holiday rental business was a trade. Although controversial, the rules almost changed in 2010 but proposals didn’t go ahead due to the General Election announcement. (Sound familiar?) 

Amendments to the Finance Bill to finalise the changes aren’t yet approved, however, these are some key points: 

Business asset disposal relief (BADR). This is currently available when you sell some qualifying FHL properties. Tax on gains is 10% rather than the residential rate of 18% or 24% from April 2024. This applies if it’s within the taxpayer’s lifetime BADR limit which is currently £1million. After the FHL rules change BADR won’t apply. 

 

Business asset rollover relief. You can currently defer profit made when you sell an FHL property if you’re reinvesting it in another business asset. This won’t apply from 6 April 2025 if the changes go ahead. 

 

Gift hold-over relief. You can currently hold over any gains if you give away an FHL property to a family member, for example. This means Capital Gains Tax isn’t payable if the property is used solely as an FHL. The changes will remove this relief. 

 

Capital allowances. FHL owners can deduct the cost of kitchens and bathrooms, heating, plumbing, electrical and lighting fittings as well as furniture. It’s possible to claim up to 100% relief in the year you spend the money. It’s not yet clear what will happen concerning previously claimed allowances when the rules change. 

 

Pensions. Your FHL income won’t qualify as relevant earnings for your pension. This reduces your scope for tax-free pension contributions so you’ll want to review your retirement plans. 

We don’t yet know the tests that will decide whether property letting businesses still qualify as trades. The OTS suggested factors such as the number of properties let, the length of short term lets and personal use of property. How much personal time you spend on property letting and services is another consideration. This is likely to mean it’s your full time occupation. 

 

Before the rules change you might want to think about your longer term financial plans. If you’re considering selling some or all of your FHL properties you might want to go ahead before April 2025. You might also want to consider gifting a FHL property as part of your succession planning. 

 

Please get in touch if you’re a FHL owner and would like to discuss how these changes might affect you.