Abolition of the Furnished Holiday Let (FHL) regime

Further to the government’s announcement in the March 2024 budget, HMRC have recently released details and have clarified points of uncertainty in connection with the planned removal of the FHL regime. This will apply from 1 April 2025 for corporation tax and 6 April 2025 for income tax. The changes made are likely to increase the tax burden for those that currently let out FHL properties.

Once the FHL regime has been removed, the FHL properties will be included in a person’s normal residential rental business and will be subject to the same rules as normal residential rental properties. This will see the following key changes:

• Mortgage interest costs will no longer be deductible in full and relief for these costs will be restricted at the basic rate of income tax.
• The taxable profits received from a FHL will no longer be classed as relevant earnings for determining the level of personal pension contributions that will attract tax relief.
• Capital allowances will no longer be available on capital expenditure. Instead, HMRC will permit a deduction for any domestic items that are replaced. Where a FHL business has an existing capital allowance pool it will still be able to benefit from writing down allowances, but any new expenditure cannot be added to this pool.
• The favourable Capital Gains Tax reliefs, that were available on disposal (such as Business Asset Disposal Relief, Gift Relief and Holdover Relief) will no longer be available. There may be an opportunity to claim for these reliefs if the FHL business is disposed of prior to April 2025 but this is subject to anti-forestalling rules and advice would need to be sought before any disposal takes place.
• Losses that are carried forward from a FHL business will be able to be offset against future rental profits of the normal UK rental business. Therefore, these losses will not be lost.
• Profits from a FHL business that are held by spouses could be split as the parties agreed (for income tax planning purposes). Under normal rental rules the new default position is for these profits to now be split 50-50, unless HMRC are otherwise notified by sending in a form 17.

If you have any questions concerning the above changes or wish to explore any ways to mitigate the tax impact of the removal of the FHL regime, please contact 023 8046 1237 or email Joe Wilson if you would like more information on the above.