The upcoming abolition of the Furnished Holiday Lettings (FHL) tax regime represents a pivotal change for individuals, corporations, and trusts involved in the FHL accommodation sector. Changes will take effect from April 2025 and will align the tax treatment of FHLs with other property income, eliminating specific benefits that FHL landlords currently enjoy. This blog delves deeper into what this change entails, who it affects, and the broader implications for the property market.

Who is Affected?

The change impacts a broad spectrum of stakeholders including:

• Individuals: Private landlords who own and rent out furnished holiday properties.
• Corporates: Companies that manage portfolios of FHL properties.
• Trusts: Trust entities that hold FHL properties as part of their asset management strategies.

General Description of the Measure

This legislative update removes the distinct tax treatment and separate reporting requirements for FHLs. Starting in April 2025, income and gains from FHLs will be integrated into the taxpayer’s broader UK or overseas property business, treated like any other property income.

Policy Objective

The primary stated goal of this policy change is to promote fairness within the property business sector. By repealing the advantageous tax treatment previously given to FHLs, the government aims to level the playing field between FHL landlords and other residential property landlords.

Background and Current Benefits

Introduced in 1984, the distinction for FHLs allowed landlords in this niche sector to enjoy several tax advantages over typical residential landlords, including:

• Exemption from finance cost restriction rules, allowing full deduction of loan interest.
• More favourable capital allowances rules.
• Access to various capital gains tax reliefs meant for trading business assets.
• The ability to count income as relevant UK earnings for pension relief calculations.

Details of the New Legislation

Effective Dates:

• Income Tax and Capital Gains Tax: From 6 April 2025.
• Corporation Tax and Corporation Tax on chargeable gains: From 1 April 2025.

Key Changes Include:

• Finance Cost Restrictions: Alignment with other property businesses by limiting loan interest deduction to the basic rate for Income Tax.
• Capital Allowances: Removal for new expenditures, replaced by ‘replacement of domestic items relief’.
• Capital Gains Tax Reliefs: Withdrawal of reliefs such as roll-over relief, business asset disposal relief, and others for FHL properties.
• Pension Calculations: FHL income will no longer be considered as relevant UK earnings for pension relief.

Transitional Rules:

• Existing FHL businesses with ongoing capital allowances pools can continue claiming writing-down allowances on that pool.
• Losses from FHL business can be carried forward and set off against future profits of either the UK or overseas property business.

Anti-Forestalling Measures:

• To prevent exploitation of the outgoing rules, an anti-forestalling rule applies from 6 March 2024, restricting the use of unconditional contracts to gain capital reliefs under the current FHL rules.

Implications for Stakeholders

The abolition of the FHL tax regime necessitates significant adjustments for those currently benefiting from these rules. Landlords must reassess their investment and tax strategies, potentially facing higher operational costs and reduced margins. The property market may also see shifts in investment patterns as the attractiveness of FHLs aligns more closely with other types of property investments.

Conclusion

The upcoming changes to the FHL tax regime mark a significant shift in property taxation in the UK, aiming to foster a more equitable environment for all property business participants. As we approach the effective dates, stakeholders should prepare to adapt to these changes, seeking advice and adjusting strategies to navigate this new landscape effectively.

Stay updated with our blog for more insights and guidance on how to manage these changes in the FHL sector.