What Are Furnished Holiday Lettings (FHL)?
A furnished holiday letting is a property that is rented out on a short-term basis usually to holidaymakers or tourists. These properties are fully furnished, with all the necessary amenities, including appliances, linens, and furniture, to ensure that guests enjoy a comfortable stay. Typically, FHLs are rented out for durations ranging from a few days to several weeks, offering more flexibility than long-term leases.
While the concept of renting out holiday homes is not new, the rise of platforms like Airbnb, Booking.com, and Vrbo has made it easier for property owners to tap into the short-term rental market, leading to a boom in the industry.
What is changing?
Starting from April 2025, tax changes will affect owners of furnished holiday lettings (FHLs) in the UK. These changes, announced in the 2024 Spring Budget, will alter the tax treatment for property owners engaged in short-term holiday rentals. Below is an overview of the key changes:
- Mortgage Interest Relief
Currently, FHL owners can deduct mortgage interest payments directly from their rental income, reducing taxable profits. However, from April 2025, this relief will be restricted to a 20% tax credit, irrespective of the owner’s income tax bracket. This adjustment means higher and additional rate taxpayers, who previously benefited from 40% or 45% relief, will experience increased tax liabilities.
- Capital Gains Tax (CGT) on Property Disposal
At present, profits from selling an FHL may qualify for Business Asset Disposal Relief, taxing gains at 10% for the first £1 million of lifetime gains. Additionally, owners can defer gains by reinvesting in new business assets. Post-April 2025, these benefits will be abolished. The standard residential property CGT rates—currently 18% for basic rate taxpayers and 24% for higher rate taxpayers will apply, and the option to roll over gains into new assets will be eliminated.
- Capital Allowances and Allowable Expenses
FHL businesses can currently claim capital allowances on fixtures, fittings, and integral features like heating and electrical systems. From April 2025, this provision will be removed. Owners will only be able to deduct the cost of replacing domestic items against rental income, aligning FHLs with standard residential property rules. Existing capital allowance pools can be carried forward, but no new claims will be permitted under the previous regime.
- Pension Contributions
Currently, profits from FHLs are considered “relevant earnings,” allowing owners to claim tax relief on pension contributions. After April 2025, FHL income will no longer qualify as relevant earnings for pension purposes. This change may limit the amount owners can contribute to their pensions with tax relief and could affect National Insurance contributions.
- Income Splitting Between Spouses
Presently, married couples can apportion FHL income between themselves without formal documentation. Post-April 2025, to allocate income unequally, couples must submit a ‘Form 17’ to HM Revenue & Customs within 60 days of signing. Without this form, income will default to a 50:50 split. Advice should be sought on whether this is appropriate however as you will need to provide evidence that your beneficial interests are also unequal.
- Loss Relief
From April 2025, losses from FHLs can be carried forward and offset against future profits from other rental properties. Previously, such losses could only be offset against profits from the same FHL business.
- Council Tax Implications
In addition to the above changes, many local authorities are implementing measures to increase council tax on second homes, including FHLs. For example, in Cornwall and other parts of the UK, council tax on second homes has doubled since April 2024. These measures aim to address housing shortages but may impact the viability of maintaining holiday lets.
The abolition of the Furnished Holiday Letting regime marks a significant shift in the taxation of holiday rental properties. If we can assist you in any way, please do not hesitate to contact your usual advisor on 01633 810081 or email info@kilsbywilliams.com
