As of 6 April 2025, significant changes to the Furnished Holiday Lettings (FHL) tax regime are set to take effect, impacting property owners who currently benefit from this tax-advantaged structure. With the abolition of the FHL regime, many property owners will need to reassess how they manage their holiday letting businesses to adapt to the new rules.
In this article, we break down what these changes mean, how they will impact FHL property accounts, and what property owners should consider as they prepare for this transition.
What Is the Furnished Holiday Lettings (FHL) Tax Regime?
The FHL regime has historically provided beneficial tax treatment for property owners who let out furnished properties in the UK or the European Economic Area (EEA) as holiday rentals. Properties meeting specific criteria, such as minimum occupancy thresholds, could be classified as FHLs and receive tax benefits typically unavailable to standard residential lets. The main benefits have included:
- Capital allowances on furniture, fixtures, and fittings within the property
- Eligibility for Capital Gains Tax (CGT) reliefs, such as Business Asset Disposal Relief (formerly known as Entrepreneurs' Relief) and Roll-Over Relief
- Losses generated by FHL businesses could be offset against other income
- Income treatment under trading income rules, potentially providing favourable tax positioning.
With the upcoming abolition of the FHL tax regime, properties that once qualified will be treated as standard residential lets for tax purposes, which changes the tax landscape for FHL property owners in several key ways.
Key Impacts of the FHL Regime Abolition on Property Owners
Starting 6 April 2025, FHL properties will no longer be eligible for the specific tax benefits that have historically applied. Let’s take a closer look at the primary changes.
1. Loss of Capital Allowances on Furniture, Fixtures, and Fittings
One of the key benefits of the FHL regime has been the ability to claim capital allowances on assets within the property. For FHLs, capital allowances could be claimed on qualifying items like:
- Furniture, such as sofas, beds, and dining tables
- Fixtures, such as built-in kitchen units and bathroom fittings
- Equipment, including white goods, heaters, and other appliances.
After the FHL regime ends, capital allowances will no longer apply to these types of property items. Instead, property owners will need to rely on Replacement Relief.
Replacement Relief Explained
Replacement Relief permits property owners to deduct the costs of replacing furniture, fixtures, and fittings. However, there are key differences from capital allowances:
- Replacement Relief only applies when items are replaced, not on original purchases.
- Property owners can only claim a deduction in the tax year the replacement is made, and not on an annual basis as capital allowances previously allowed.
This means that after 6 April 2025, the tax deductibility of these items will be more limited, potentially increasing the taxable profits of FHL businesses.
2. Shift to Standard Property Income Tax Rules
Another substantial change is that income generated from FHL properties will be treated as standard property income rather than under trading income rules. As a result, several tax benefits tied to the FHL classification will be removed, including:
- FHL income will no longer qualify for Class 4 National Insurance Contributions relief.
- Property income will be taxed solely as part of property income rules, with reduced potential for claiming certain business-related deductions.
For FHL owners, this means that rental income from holiday lets may now fall under higher tax rates and lose the flexibility that trading income treatment allowed.
3. Changes to Capital Gains Tax (CGT) Treatment and Reliefs
The abolition of the FHL regime also affects Capital Gains Tax (CGT) treatment when selling or transferring a holiday let property.
Under the current FHL rules, property owners could qualify for several CGT reliefs:
- Business Asset Disposal Relief (formerly Entrepreneurs’ Relief), which reduces the CGT rate to 10% for qualifying properties
- Roll-Over Relief, allowing property owners to defer CGT on gains if the proceeds are reinvested into another qualifying business asset.
With the end of the FHL regime, these CGT reliefs will no longer apply to FHL properties. Instead, property disposals will be taxed as residential property gains, meaning that:
- Standard CGT rates (18% or 28% for residential property gains, depending on individual circumstances) will apply.
- Gains cannot be deferred through Roll-Over Relief, nor will the 10% Business Asset Disposal Relief rate be available.
This change could result in higher CGT liabilities for owners who choose to sell their holiday let properties after 6 April 2025.
4. Changes to Loss Treatment
Currently, FHL losses can be offset against other forms of income, providing potential tax savings in years where a loss is realised. Following the abolition of the FHL regime, however, FHL-related losses will be limited to offsetting other property income, similar to rules for standard rental properties. Consequently, FHL owners will have less flexibility in offsetting losses, which could result in higher overall tax liabilities.
Planning Ahead: What Property Owners Should Consider
As these changes come into effect in April 2025, FHL owners should review their financial and tax planning strategies to ensure they are optimising for the new rules. Here are some key considerations for property owners:
1. Evaluate Timing for Capital Expenditures
Since capital allowances will no longer be available after 2025, property owners considering upgrades or purchases of furniture, fixtures, or equipment should consider doing so before the new rules apply. Any qualifying purchases made before April 2025 can still be claimed under the capital allowances framework.
2. Reassess Profitability with Updated Tax Rates
With higher potential tax liabilities on FHL income, now is the time to evaluate the profitability of your FHL business. This is especially relevant for those with multiple properties or for those who use the FHL as a significant source of income.
3. Consider the Impact on Long-Term Investment Plans
Property owners should take into account the reduced CGT reliefs and plan accordingly if they intend to sell or transfer their properties in the coming years. For those who had counted on Business Asset Disposal Relief or Roll-Over Relief to manage CGT liabilities, alternative strategies may need to be explored.
4. Seek Professional Advice for Transition Planning
As these changes may significantly impact overall tax liabilities, working with a tax professional can provide valuable insights and tailored planning opportunities. A professional can help navigate the transition smoothly, ensure compliance with the new rules, and maximise any remaining tax reliefs before the April 2025 deadline.
Conclusion
The abolition of the FHL tax regime brings about substantial changes for owners of holiday let properties. The removal of capital allowances, CGT reliefs, and FHL-specific income tax benefits may increase tax liabilities and limit previous tax planning options.
If you own an FHL property, now is the time to review your financial plans, explore potential tax-efficient strategies, and assess how these changes will affect your long-term property investment goals. We encourage you to reach out to our team of experts to discuss personalised advice and proactive planning strategies for the 2025 tax year and beyond.
For further information or to schedule a consultation, please contact us!
コメント