Furnished Holiday Lets – Tax Benefits

Peter Bussey -

Furnished Holiday Lets (FHLs) in the UK have specific rules that property owners must adhere to in order to qualify for various tax benefits. A summary of rules for each Property:

Qualification Criteria

  1. Location:
  • Must be located in the UK or the European Economic Area (EEA).
  1. Furnishing:
  • It must be furnished, meaning it should contain sufficient furniture and fittings for normal occupation​.
  1. Commercial Letting:
  • Let on a commercial basis with the intention to make a profit​​.

Letting Conditions

  1. Availability:
  • Available for letting to the public for at least 210 days in the tax year​​.
  1. Actual Letting:
  • It must be actually let for at least 105 days in the tax year. Days when the property is let to friends or relatives at zero or reduced rates do not count towards this total​​.
  1. Pattern of Occupancy:
  • No lettings for more than 31 consecutive days to the same person, and the total of such longer-term lettings must not exceed 155 days during the tax year​​.

Elections

  1. Averaging Election:
  • If you own multiple FHL properties, you can average the occupancy levels across all your properties to meet the letting conditions​​.
  1. Period of Grace Election:
  • If the letting conditions are met in some years but not in others, you can use a period of grace election for up to 2 consecutive years if you can demonstrate a genuine intention to meet the letting condition but were unable to do so​.

Tax Benefits

  1. Deduction of Finance Costs:
  • FHL owners can deduct the full amount of their finance costs, such as mortgage interest, from their rental income​​.
  1. Capital Gains Tax (CGT) Relief:
  • Qualifying FHLs can benefit from Business Asset Disposal Relief (BADR), which reduces the CGT rate to 10% on gains up to a lifetime limit of £1m​.
  1. Capital Allowances:
  • Owners can claim capital allowances on items such as furniture, fixtures, and fittings, which can be deducted from rental income​.
  1. Pension Contributions:
  • Profits from FHLs count as relevant earnings for pension purposes, allowing owners to make tax-relieved pension contributions​​.

However recent changes to the tax regime for Furnished Holiday Lets (FHLs) in the UK were announced in the Spring Budget of 2024, with the significant impacts set to take effect from April 2025.

Key Changes

  1. Abolition of FHL Tax Advantages: Starting from April 2025, the special tax regime for FHLs will be abolished. This means the various tax benefits that FHLs currently enjoy will no longer be available. These include:
  • Full Deduction of Finance Costs: Currently, FHL owners can deduct mortgage interest from their rental income. This will no longer be possible under the new rules​​.
  • Capital Gains Tax (CGT) Relief: Business Asset Disposal Relief (BADR) allowed for a 10% CGT rate on qualifying gains. This will be replaced by standard residential property CGT rates of 18% for basic rate taxpayers and 24% for higher rate taxpayers (28% for disposals up to March 2024)​​.
  • Capital Allowances: FHLs could claim capital allowances on items such as furniture and fittings. This benefit will also be removed​​.
  • Relevant Earnings for Pension Contributions: Income from FHLs currently counts as relevant earnings for pension purposes, allowing for tax-relieved pension contributions. This will no longer be the case​​.
  1. Anti-Forestalling Measures: From March 6, 2024, anti-forestalling rules will apply to prevent individuals from using unconditional contracts to lock in current tax benefits before the regime changes​​.
  2. Transition Adjustments: Owners may need to make transitional adjustments, such as accounting for the disposal value of assets where capital allowances have been claimed​​.

Implications

  • Increased Tax Burden: The changes will likely increase the tax burden on those owning FHLs, as they will lose the ability to deduct full finance costs and benefit from lower CGT rates.
  • Impact on Pension Contributions: The loss of relevant earnings status for pension purposes could reduce the amount of tax-relieved pension contributions for owners.
  • Potential Shift to Long-term Lettings: Without the tax advantages, property owners might consider shifting from short-term holiday lets to long-term residential lettings​​.

Strategic Considerations

Owners of FHLs should seek professional advice to understand the full impact of these changes on their financial situation and consider potential adjustments to their investment strategy. This might include evaluating the viability of continuing with holiday lets versus transitioning to long-term rentals or exploring incorporation options to mitigate tax impacts​.

These changes are part of broader efforts to address housing availability and affordability issues by reducing the tax incentives for short-term holiday rentals, thereby encouraging more properties to be available for long-term tenants​.

Get in touch

If you would like further information on these areas, please contact one of the team.

Phone: 01508 333040

Email: office@abcabacus.co.uk

Website: abcabacus.co.uk