Preferential tax rules for furnished holiday lettings (FHLs) will end in April 2025, removing any tax incentive for individuals to offer short-term holiday lets.
With April fast-approaching, the expert team at Clayton & Brewill discuss the upcoming changes and how these may impact you.
What is changing?
- Admin – rather than being calculated and reported separately, income from FHLs will form part of your UK or overseas property business.
- Capital allowances – from April 2025, the rules on capital allowances for FHLs change for new expenditure, and tax relief will come via replacement of domestic items relief.
- Pensions – previously, income from FHLs has counted as relevant UK earnings for pension purposes, allowing tax-advantaged pension contributions. However, after these changes, this will no longer be the case. FHL owners who rely on this income to make pension contributions may need to seek alternative sources of earnings to maintain their contribution levels.
- Finance costs – before April 2025 individuals with FHLs have had relief for loan interest on their properties allowed in full. However, after these new rules come into force interest will be restricted to relief at basic rate for Income Tax. This will particularly impact those paying tax at higher rates.
- Losses – after the new rules are introduced individuals’ UK or overseas property business will include the amalgamated profits and losses of all properties in that business. Any losses brought forward from FHLs can be carried forward and set against the future profits of the property business. However, losses from a UK property business cannot be used to offset overseas property income, and vice versa.
- Disposal of business and business assets – Capital Gains Tax reliefs for traders, such as Business Asset Rollover Relief and Business Asset Disposal Relief (BADR) have been available for FHLs. With the change, this access will be blocked, ruling out availability of these significant reliefs in the longer term.
Impact of the new rules
With tax bills likely to increase and scope for pension provision falling, many individuals may not want to remain in with FHL market. Selling the property is one solution, although there are also tax implications to take into account for this. The disposal might be eligible for BADR, and a 10% tax charge. Where BADR is not available, gains would be chargeable at the new 24% rate for residential property. Another possibility could be passing the property on to someone new, perhaps the new generation, although there will still be tax implications to consider.
How we can help
If you need any further advice on how these changes to furnished holiday lettings might affect you and whether you would like to restructure your affairs, please do not hesitate to get in touch with a member of the Clayton & Brewill team today.
