Furnished Holiday Lettings (FHL) have historically offered a desirable opportunity for property owners to earn rental income while enjoying tax advantages associated with businesses. However, recent changes to the tax regulations concerning FHLs are expected to impact property owners and investors significantly. It is essential to grasp the new rules. This article highlights the important changes, their consequences, and what property owners should do to remain compliant.
What is a Furnished Holiday Letting (FHL)?
A Furnished Holiday Letting is a type of rental property that meets specific criteria set out by HM Revenue and Customs (HMRC). For a property to be classified as a FHL, it must:
1. Be let on a short-term basis (i.e., for at least 105 days per year, but no more than 31 days at a time).
2. Be furnished to a high standard.
3. Be available for letting for at least 210 days per year.
4. Be actually let for at least 105 days per year.
FHLs have traditionally offered specific tax benefits that set them apart from standard buy-to-let properties. These advantages include the option to deduct expenses from rental income, eligibility for capital allowances on furnishings and fittings, and potentially more favourable treatment under inheritance tax regulations.
What are the changes?
As part of the UK government’s continuous efforts to standardise tax regulations and eliminate loopholes, several important changes regarding the tax treatment of Furnished Holiday Lettings (FHLs) have been implemented, especially concerning eligibility for specific tax reliefs. Here’s a summary of the key adjustments:
• Loan interest will be restricted to the basic rate of Income Tax, as finance cost restriction rules will now apply for FHLs.
• Capital allowances will no longer be available for new expenditure.
• FHLs will become eligible for replacement of domestic items relief in line with other property businesses.
• No more access to tax relief on eligible gains for trading business assets.
• Income generated from FHLs will no longer be considered within relevant UK earnings when maximum pension relief is calculated.
The changes above will affect any person, business or trust that operates or sells accommodation classified as FHL.
When will these changes come into place?
• From 1 April 2025 for Corporation Tax and for Corporation Tax on chargeable gains
• On or after 6 April 2025 for Income Tax and for Capital Gains Tax
What action can you take?
• Review your existing holiday let business and in particular, consider your capital allowances position
• Sell or pass on the rental property
• Change rental strategy
• Seek professional advice
If you own a FHL and want to understand the changes and how we can help then please get in touch with Catherine Hancock who is our in house property expert.