How are the rules to the taxation of Furnished Holiday Lets changing?

As we reported in our earlier blog on the UK Government’s post election tax announcements, the Furnished Holiday Lets (FHL) tax regime is scheduled to be abolished from April 2025. While the detail on this marked change in the UK’s approach to the taxation of FHL is likely to be fleshed out in October’s Budget, we set out below what is currently known and key considerations for those likely to be impacted.

How are FHLs currently taxed?

In broad terms where a property is let out as a FHL there are a number of tax benefits available to landlords (be they an individual, corporate or trust), including:

• For Income Tax (IT) purposes, interest on mortgages over properties that qualify as a FHL can be deducted from rental income.
• Income arising from property held jointly by a married couple or civil partners is normally treated as being shared equally for IT i.e., couples are taxed 50:50 on such income.The income from a FHL held jointly between spouses / civil partners is treated differently: income can be split in the way that the couple has agreed to split the profits between them.
• A disposal of a FHL can, subject to certain criteria, benefit from relief from Capital Gains Tax (CGT).
• Capital allowances are available on certain items within a FHL.
• While there are limits, FHL profits can be considered as ‘UK earnings’ for pension contribution purposes.

The availability of the FHL tax breaks is, as is the case with most tax reliefs, subject to satisfaction of certain criteria.

What is changing?

In short, the tax benefits available to landlords of FHLs are being removed from April 2025. Thereafter, income and gains from FHLs will be treated on similar terms as a taxpayer’s other property income and gains. Importantly, for married couples / civil partners jointly owning a FHL, that will mean a reduced scope for IT planning: the 50:50 rule will be applied to such income unless it is disapplied to reflect the actual share of ownership of the property. CGT will be payable on the disposal of FHL properties, subject to transitional rules, and there will be no interest deductions for landlords subject to IT.

Draft legislation has been published to implement the removal from the FHL tax regime from the statute books. Commentators have raised queries on the draft legislation, and much depends on whether or not that leads to amendments being made before legislation is formally enacted.

Why are the rules being changed?

The UK Government’s position is that the removal of the tax benefits available to FHLs will promote fairness, and ensure that landlords of FHLs are treated in the same way as those of other residential property for tax purposes.

When is the change happening?

The change will take place on different dates, depending on the tax in question. According to the UK Government’s policy paper, the abolition of the FHL tax regime will have effect:

• on or after 6 April 2025 for Income Tax and CGT purposes.
• from 1 April 2025 for Corporation Tax and for Corporation Tax on chargeable gains.

Will there be transitional rules?

There will be transitional rules to facilitate adjustment to the new regime, and those are detailed within the Government’s policy paper and draft legislation. They include, amongst other things:

• Continued (albeit limited) availability of existing capital allowances: existing FHLs will be able to continue to claim capital allowances on expenditure incurred before the new rules came into effect, but expenditure incurred after the abolition of the FHL tax regime would not benefit from capital allowances but may be eligible for ‘replacement of domestic items relief’.
• Certain CGT reliefs for disposals of FHL will continue to be available where conditions for the relevant relief apply in a future year, provided a property meets the criteria to be considered a FHL before the FHL regime was abolished.
• Following the abolition of the FHLs tax regime, former FHLs will be part of a UK / overseas property business (depending on the circumstances) and that business will include amalgamated profits and losses of all properties that are part of that business.
• There may be losses to be carried forward by FHL businesses after the FHL tax regime is abolished. Those losses will be able to be carried forward and set off against the future profits of the UK or overseas property business.

What does this mean for FHL landlords?

FHL landlords will need to adjust: notwithstanding the transitional measures mentioned above, the abolition of the FHLs tax regime is a marked change to the UK’s tax code.

What should FHL landlords do?

The abolition of the FHLs tax regime is one of the many aspects that are expected to feature in the UK Budget in October. FHL landlords are advised to liaise with their advisors on how best to adapt to the proposed changes.