The UK government has abolished the Furnished Holiday Lettings (FHL) tax regime, effective from April 2025. This change marks a significant shift in how holiday let properties are taxed, aligning them with other property businesses. Property owners need to be aware of these changes and how it will affect them.
By Mark Duddridge – Senior Tax Manager
What Was the FHL Regime?
The FHL regime provided tax advantages to property owners who met specific criteria, such as letting their properties for a minimum number of days per year. These benefits included:
- Full deduction of finance costs, such as mortgage interest.
- Access to capital allowances for furnishings and fixtures.
- Reliefs on chargeable gains, such as rollover relief and business asset disposal relief.
- Inclusion of FHL income as relevant UK earnings for pension relief calculations.
Why Is the Regime Being Abolished?
The government aims to promote fairness by removing the preferential treatment of FHLs compared to other property businesses. This change is part of a broader effort to level the playing field for landlords and ensure tax rules are consistent across the board.
Key Changes for Holiday Let Owners
From April 2025, the following changes will take effect:
- Finance Costs: Mortgage interest and other finance costs will be restricted to the basic rate of Income Tax.
- Capital Allowances: Owners will no longer be able to claim capital allowances for new expenditures. Instead, they can claim relief for the replacement of domestic items.
- Capital Gains Tax (CGT): Reliefs such as rollover relief and business asset disposal relief will no longer apply to FHL properties.
- Pension Relief: FHL income will no longer count as relevant UK earnings for pension relief calculations.
Transitional Rules
To ease the transition, the government has introduced specific measures:
- Existing capital allowances pools can continue to be used for historical expenditures. However, new expenditure from April 2025 must follow the rules for other property businesses and can no longer be added to the pool.
- Losses from FHL properties can now be offset against profits from other properties within the same property business.
- Business asset disposal relief for CGT may still apply to property disposals within three years of a FHL business that ended prior to 5 April 2025, provided the FHL conditions were met before the regime’s abolition.
What Should Property Owners Do?
For existing holiday let owners, these changes may result in higher tax bills and reduced profitability. It’s essential to review your property portfolio and consider the financial implications. Here are some steps to take:
- Seek Professional Advice: Consult with an accountant to understand how these changes will affect your specific circumstances.
- Review Financing: Assess the impact of the finance cost restrictions on your cash flow.
- Plan for the Future: Consider whether to continue operating holiday lets or explore alternative property investment strategies.
The abolition of the FHL regime represents a significant change for property owners in the UK. While the transitional rules provide some relief, the new tax landscape will require careful planning and adaptation. At UHY Ross Brooke we are here to guide our clients through these changes and help them make informed decisions for their property business. Do get in touch if you would like guidance or tax advice for letting your holiday home.
