The end of the Furnished Holiday Letting (FHL) tax regime on 5th April 2025: With effect from 6th April 2025, all Furnished Holiday Lettings will be treated the same as any other residential letting business and all the benefits of an FHL will disappear. In the notes below we describe the transitional arrangements. After 5th April 2025, former FHL properties will form part of the taxpayer’s UK or overseas property business, which will then include all property profits and losses in that business.
Published 4th November 2024
The Furnished Holiday Letting (FHL) tax regime ends on 5th April 2025
With effect from 6th April 2025, all Furnished Holiday Lettings will be treated the same as any other residential letting business and all the benefits of an FHL will disappear. In the notes below we describe the transitional arrangements.
After 5th April 2025, former FHL properties will form part of the taxpayer’s UK or overseas property business, which will then include all property profits and losses in that business.
None of the changes have any effect on the VAT status of the FHL business or on the VAT treatment.
There are some major planning considerations below.
Benefits of a Furnished Holiday Letting (FHL)
Capital Allowances
Capital Allowances allow the taxpayer to deduct from profits the initial cost of furnishings and equipment, usually in the same year as purchase. Capital Allowances are not available in respect of residential property (and therefore there is no allowance for the initial purchase of furnishings or equipment). However, furnishings and equipment bought for an FHL do normally qualify for Capital Allowances, reducing the tax liability for the year in which they are first purchased.
With effect from 6th April 2025, no claim may be made for Capital Allowance for items purchased on or after that date, but where an FHL business has an ongoing Capital Allowance pool of expenditure as at 6th April 2025, it may continue to claim writing down allowances, but not add to the pool.
Inheritance Tax
Business Property Relief would eliminate the Inheritance Tax (IHT) on the underlying assets. In general, an FHL will not qualify for Business Property Relief. However, in a recent case of Grace Joyce Graham dec’d, the Tribunal accepted that there is a complete spectrum of lettings from basic letting at one end to a full hotel at the other. Where, along the spectrum, the cut-off is to be found has not yet been decided. In the Graham case, the Tribunal decided that, because guests had been provided with bicycles, pool, etc., the property did qualify for Business Property Relief.
Capital Gains Tax
Capital Gains Tax (CGT) applies to the gain in value realised when you dispose of a property. If the property has not been your main residence, then there are few reliefs or allowances. When you sell a rental property, you can expect CGT of 18% / 24% (mostly 24%) (correct at the time of writing), unless it has been an FHL. FHLs qualify for Business Asset Disposal Relief (BADR) reducing the rate of CGT to 10%.
Where an FHL business ceases on or after 6th April 2025, BADR is not available. Where cessation occurs before 6th April 2025, BADR will continue to be available if the disposal of the business asset occurs within three years. However, the rate of Capital Gains Tax applicable to disposal of assets qualifying for BADR has risen from 10% to 14% on 6th April 2025.
Pensions
Because a normal letting is treated more like an investment, the income from it may not be used as relevant income when considering pension contributions. It is not “pensionable income”. Income derived from an FHL is pensionable income and the normal limits for pension contributions apply.
From 6th April 2025, income from an FHL will no longer be pensionable income. As with all matters concerning pensions, you should contact your IFA for further advice.
Losses
Losses derived from ordinary lettings can only be carried forward to future years to offset profits made in future years. Losses derived from an FHL may normally be offset against other income of the same year.
Losses made after 5th April 2025 will be treated the same as the losses of any other residential lettings business: they may only be set against the profits of the same business in the same year or in future years.
The end of the Furnished Holiday Letting (FHL) tax regime on 5th April 2025: With effect from 6th April 2025, all Furnished Holiday Lettings will be treated the same as any other residential letting business and all the benefits of an FHL will disappear. In the notes below we describe the transitional arrangements.
Planning considerations
Owners of FHLs should consider what advantages may now be obtained by changing the timing of events.
- Capital expenditure on improvements to the furnishings and equipment might be brought forward to a date before 6th April 2025 in order to qualify for capital allowances.
- If retirement is in contemplation, it may be worth considering ceasing the FHL business before 6th April 2025 in order to qualify for Business Asset Disposal Relief (BADR) on a sale of the property within three years.
- New FHLs must proceed with caution. Under the current rules, a lettings business will qualify for FHL status if it meets the criteria in the first twelve months. However these criteria are now modified in that the business must meet the criteria before 6th April 2025. Unless the property was available for use before 8th September 2024, it cannot now meet the 210 days availability test in the year ended 5th April 2025.
FHL criteria applicable until 5th April 2025
Please note: ALL of the criteria must be satisfied.
- Location
To qualify as an FHL, the property must be in the EEA. - Availability
To qualify as an FHL, the property must be available at least 210 days in the year. - Actual letting
To qualify as an FHL, the property must be actually let for 105 days or more on a commercial basis. However, you may claim a year of “grace” if you have one or two years where occupancy does not meet 105 days. Periods of grace are not available after 5th April 2025. - Longer holidays
If the total number of days of all the lettings over 31 days is in excess of 155 days, then the property will not be an FHL. Lettings of over 31 days are not included in the number of let days.
The end of the Furnished Holiday Letting (FHL) tax regime on 5th April 2025: With effect from 6th April 2025, all Furnished Holiday Lettings will be treated the same as any other residential letting business and all the benefits of an FHL will disappear. In the notes below we describe the transitional arrangements.
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The information contained in this article is believed to be correct at the time of publication. The content of this article is intended to be a brief summary of the principal points of the legislation or proposed legislation only, and it is provided for general guidance only. It may not take into account subsequent changes in the law and of necessity it omits much detail. Taxation is a complicated subject and is subject to change. You should only rely on advice prepared specifically for you. Neither the writer nor Landlords Tax Services Ltd can be held liable for any loss arising from any act or omission by you as a result of your understanding of this article. If the subject matter is of interest you should contact us to see if there is a relevant update, and to take professional advice which takes into account your circumstances.
The end of the Furnished Holiday Letting (FHL) tax regime on 5th April 2025: With effect from 6th April 2025, all Furnished Holiday Lettings will be treated the same as any other residential letting business and all the benefits of an FHL will disappear. In the notes below we describe the transitional arrangements.