From April 2025, the tax rules that govern furnished holiday lets (FHLs) will change significantly. The government has announced that the FHL regime, a set of tax benefits for landlords of furnished holiday properties, will be abolished.
This decision marks a pivotal shift in how holiday lets will be taxed in the future, and it’s crucial for property owners to understand what this means and how to prepare. So, let’s dig deeper into furnished holiday let tax rules.
What is the FHL regime?
The FHL regime has been a cornerstone of the UK tax system for landlords of furnished holiday properties. Under this regime, owners of qualifying holiday lets have enjoyed several tax advantages. These benefits include being able to claim capital allowances on the cost of furniture and equipment, eligibility for entrepreneurs’ relief and the ability to count the income as relevant earnings for pension purposes.
For a property to qualify as an FHL under the current rules, it must be let commercially as holiday accommodation for at least 105 days per year and available for letting for at least 210 days per year. These properties must also meet other specific conditions, such as not being let to the same person for more than 31 days at a time.
What changes will take place in April 2025?
From April 2025, the FHL regime will no longer exist. This means that furnished holiday lets will no longer enjoy their specific tax benefits under the current rules. Instead, these properties will be taxed under the same rules as other rental properties. This change will have several implications for property owners.
One of the most immediate impacts will be the loss of capital allowances. Under the FHL regime, owners could claim these allowances on items like furniture and fittings, reducing their taxable profit. Without this benefit, the cost of maintaining and updating holiday properties will effectively increase.
Additionally, the abolition of the FHL regime means that income from furnished holiday lets will no longer count as relevant earnings for pension contributions. This could affect landlords who have been using their holiday income to build up their pension savings. Furthermore, the loss of entrepreneurs’ relief could impact those planning to sell their holiday property business, as they will no longer benefit from the reduced rate of capital gains tax (CGT) that this relief offers.
The impact on landlords
For many landlords, these changes may increase their tax liability. Without the ability to claim capital allowances, profits from holiday lets could be taxed more heavily. This might make it more challenging to maintain profitability, particularly for those with smaller portfolios or properties in less popular locations.
Moreover, the loss of pension benefits and entrepreneurs’ relief could lead some landlords to reconsider their long-term plans. For those who have been using holiday income as part of their retirement strategy, this change might necessitate a review of their financial planning.
What can landlords do to prepare?
While the abolition of the FHL regime represents a considerable change, there are steps that landlords can take to prepare and mitigate the impact on their finances.
- Review your portfolio: Now is the time to examine your property portfolio closely. Consider whether your current strategy will remain viable under the new tax rules. If not, you may need to consider diversifying your investments or shifting focus to other property types.
- Seek professional advice: Tax planning will become even more critical once the FHL regime is abolished. Consulting with a tax adviser or accountant can help you understand the full implications of these changes and explore ways to minimise your tax liability. This might involve restructuring your property ownership or considering other tax-efficient investment options.
- Consider selling or repurposing properties: For some landlords, selling their holiday let properties before the changes take effect might be a prudent option. If you’re considering this, it’s worth doing so sooner rather than later to take advantage of the current CGT rates and entrepreneurs’ relief. Alternatively, you might explore repurposing your properties for long-term residential letting or other uses.
- Adjust your financial planning: With the changes to pension contributions, landlords should revisit their retirement plans. Finding alternative ways to save for retirement, such as through ISAs or other investment vehicles, may be necessary.
Looking ahead
The abolition of the FHL regime will undoubtedly bring challenges, but it also presents an opportunity for landlords to reassess their strategies and make informed decisions about the future. By taking proactive steps now, property owners can position themselves to navigate this transition with greater confidence and security.
At Cottons, we’re here to help you through these changes. Our team of experienced accountants and tax advisers can provide the guidance you need to adapt to the new rules and optimise your tax position.
If you’d like to discuss how these changes to furnished holiday let tax rules will affect you, please get in touch with us.
