Abolition of the Furnished Holiday Lettings (FHL) Regime: What You Need to Know

Abolition of the Furnished Holiday Lettings (FHL) Regime

If you are an individual, corporation, or trust involved in operating or selling furnished holiday lettings (FHL), significant changes are on the horizon that could impact your financial planning and tax liabilities.

Read on to find out what this could mean for you.

What is the Government Doing?

Starting from 6 April 2025 for income tax and capital gains tax, and 1 April 2025 for corporation tax on chargeable gains, the UK government will abolish the Furnished Holiday Lettings regime.

This specific tax framework, currently distinct from other property businesses, will be integrated into the general property business tax regime. As a result, income and gains from FHLs will be treated similarly to other types of property income and gains, both in the UK and overseas.

Current Benefits Under the FHL Regime

Presently, FHLs enjoy several tax advantages that differentiate them from other property businesses, including:

• Exemption from finance cost restriction rules, which limit loan interest deductions to the basic rate of income tax for other landlords.
• More favourable capital allowances, providing better tax relief on qualifying expenditures.
• Access to reliefs from taxes on chargeable gains typically available to trading businesses.
• Recognition as relevant UK earnings for calculating pension relief, enhancing potential pension contributions.

What Will Change?

Once the new rules are implemented, landlords will face several significant changes:

• Finance cost restrictions will apply, limiting deductions for loan interest to the basic rate of income tax.
• Capital allowances will be replaced by the standard relief for replacing domestic items.
• Loss of beneficial capital gains tax reliefs that were previously available to FHLs.
• Exclusion from pension relief calculations, as FHL income will no longer qualify as relevant UK earnings.

Transitional Rules and Considerations

The government has outlined specific transitional provisions to ease the shift:

• Existing capital allowances: These will continue to be claimed through writing-down allowances on the remaining pool balance, but new expenditures will no longer qualify.
• Loss relief: Losses previously confined to FHL businesses can be offset against profits from other UK or overseas property businesses after the regime change.
• Capital gains reliefs: Properties previously qualifying for FHL benefits will lose access to reliefs like rollover relief, business asset disposal relief, and gift relief, among others. However, if certain conditions were met before the rule changes, current reliefs may still apply.
• Business Asset Disposal Relief: If FHL conditions were met before April 2025, the relief may still be available for disposals made within three years after the business ends.
• Anti-forestalling rule: Effective from 6 March 2024, this rule aims to prevent arrangements designed to exploit beneficial capital gains tax reliefs before the new regulations take effect.

How You May Be Affected

Given the elimination of these favourable tax treatments and the uncertainty around future capital gains tax rates, it may be prudent to reassess your strategy. Considerations include:

• Gifting a FHL to a family member: This could trigger a capital gains tax (CGT) event, while gift holdover relief remains available, and may also support inheritance tax (IHT) planning by removing the asset from your estate.
• Ceasing the FHL business before the end of the 2024/25 tax year: This may allow you to benefit from business asset disposal relief, which offers a reduced 10% CGT rate on gains up to £1 million, provided the disposal occurs within three years.
• Selling the FHL and reinvesting: You may defer capital gains tax by reinvesting proceeds into another qualifying asset, thus taking advantage of rollover relief whilst it can still be claimed on disposing of an FHL.

Haines Watts

Navigating the complexities of business and tax can be challenging, but you don't have to do it alone. If you have any questions or need guidance tailored to your specific tax needs, our experts are here to help.

Our team can help you navigate challenges and changes, optimize your tax position, and align your property portfolio strategy with your long-term goals. Get in touch with us today to find out how we can help you.