Tax regime Furnished Holiday Lets

If you have a holiday home, changes announced in the Budget mean you may want to take action before 5 April 2025.

One of the Budget giveaways was to reduce the top capital gains tax rate on the sale of residential property to 24%, down from 28%. However, current Government plans are to abolish the beneficial tax treatment for Furnished Holiday lettings (FHLs) from 6 April 2025.

Recent changes FHL tax

The FHL regime treats qualifying residential short-term lettings as a trade for certain tax purposes. Once the regime is abolished, owners will lose the following tax benefits:

Mortgage Interest

Mortgage interest on FHLs is currently treated as a deduction from rental income. From April 2025, relief will instead be given as a 20% tax credit so for higher and additional rate taxpayers this means a reduction in tax relief from 40% and 45% respectively.

Capital Gains Tax on FHLS

Capital Gains Tax on disposal of FHLs may currently qualify for Business Asset Disposal Relief (BADR), where the first £1m of lifetime gains are taxed at 10%. Alternatively, the gain can be ‘rolled over’ on purchase of a new business asset. From April 2025, the normal residential property CGT tax rate of 24% will apply.

Allowable Expenses for FHLs

FHL businesses are currently eligible for capital allowances, although whether there will be clawbacks on abolition is not yet clear. We do know that from April 2025, you will only be able to claim a deduction for the cost of replacing domestic items against your rents.

FHLs & Pension Contributions

Tax relief for pension contributions is limited to the higher of £3,600 or 100% of net ‘relevant earnings’. From April 2025, FHL profits will no longer be treated as relevant earnings.

I own an FHL. What action should I take?

Do you usually let out your holiday home sufficiently to satisfy the criteria for an FHL ie. let 105 days out of 210 days available for letting? If so, then you have some decisions to be take. If the current arrangements suit you, there may be no need to change but it is still sensible to check how much extra tax you may have to pay. If you are not sure, you should seek to understand the financial impact of the various changes in tax rules on FHLs and consider the two options discussed below.

One option is to sell the property. Although the sale may qualify for BADR (so taxed at 10%) and, even if it doesn’t, the headline rate of tax is also now reduced to 24% , the annual gains exemption has also reduced which might increase the final tax payable - so seek advice on your likely tax charge before you complete the transaction. Remember that capital gains on property need to be reported, and the tax paid within 60 days of completion.

Alternatively, it might be the right time to pass on the property to your family. Giving an asset to a ‘connected relative’ is treated as a disposal at market value. However, as an FHL property is a business asset, it may be possible to elect to ‘holdover’ any capital gain on disposal to relatives. Of course, if they subsequently sold it, CGT would be payable at 24% on any historic gains. In addition, the gift may have Inheritance Tax implications, particularly if you continue to use the property without paying rent), so consider your options carefully.

If your holiday home does not qualify as an FHL, there is no pressing need to act but, if you were considering a sale, the 4% reduction in CGT may mean it is a good time to sell.

Notes: the information above is published by BDO UK. Key One Property accept no liability for the accuracy of any of the information and you should obtain your own specialist tax advice.  Image for illustration only. Copyright North x North West Photography.