Guide to the abolition of the furnished holiday let (FHL) tax benefits

From April 2025, the special tax status available to owners of FHLs is expected to be abolished. Announced at the Spring Budget 2024, this guide provides an overview of the upcoming changes to the FHL tax benefits, so you can make plans to adapt and make the most of the new rules.

Last Updated: 20th March 2024

Specific details have yet to be released, but we will update this guide when there is further news to share.

What is a FHL?

For tax purposes, a furnished holiday let (FHL) is recognised as a type of property business that meets specific criteria, which include being available for commercial holiday letting for at least 210 days per year and being let to short-term visitors for at least 105 days per year. FHLs offer several tax advantages over other types of property businesses, such as:

- The ability to claim capital allowances.

- Income from the business is considered earned income for pension contributions.

- Access to various capital gains tax reliefs, including Business Asset Disposal Relief (BADR).

Changes from April 2025

With the abolition of the special tax regime for FHLs, which is expected to be in effect from April 2025, owners will see the end of current tax advantages and the introduction of transitional adjustments, the details of which have yet to be announced.

Capital allowances

For FHLs, capital allowances have been available on a wide range of expenditures, including furniture, fixtures, fittings, and equipment used within a holiday let. This has allowed FHL owners to deduct these costs from their taxable profits, thereby reducing their tax liability. The first £1M of capital expenditure could qualify for 100% relief under the Annual Investment Allowance (AIA).

With the transition away from FHL status, it is expected the availability of capital allowances for these properties will align more closely with the general tax rules for residential property rentals. Standard residential rental properties have traditionally been ineligible for the same breadth of capital allowances available to FHLs, although there are still avenues for tax relief:

- Replacement of Domestic Items Relief allows landlords to claim tax deductions for the cost of replacing domestic items such as furniture, appliances, and kitchenware. It does not cover the initial cost of furnishing a property, instead targeting the replacement of existing, worn-out, or broken items.

- Costs associated with the renovation or repair of a rental property (that do not constitute capital improvement) can be deducted from rental income. This includes expenditures that maintain the property in its current condition, rather than enhancing its value or extending its life.

- Capital improvements, on the other hand, are not immediately deductible but may influence the Capital Gains Tax calculation upon the sale of the property.

Capital Gains Tax reliefs

FHL owners have been able to access a range of Capital Gains Tax (CGT) reliefs aimed at reducing the tax burden on the sale or disposal of properties. These include Business Asset Disposal Relief (BADR), previously known as Entrepreneurs' Relief, which allows a reduced CGT rate of 10% on gains up to a £1M lifetime limit. Other reliefs like Rollover Relief and Hold-Over Relief have provided flexibility in managing and reinvesting capital gains.

Once properties lose their FHL status, they no longer qualify for these specific reliefs, aligning more closely with the general CGT regime for residential properties. It was also announced at the Spring Budget that the higher capital gains tax rate for property disposals will reduce from 28% to 24% from the 6th of April 2024 (18% for a basic rate taxpayer).

Apportionment of profits

For FHLs, the profits could be allocated in any proportion desired by the owners, regardless of their actual ownership share in the property. This allowed for strategic tax planning, especially in cases where owners had different rates of income tax.

With the end of FHL-specific benefits, the profit apportionment for non-FHL properties will adhere to the general rules applicable to property income and partnerships - the default rule is that the share of any profit or loss from the property typically aligns with the ownership interest in the property.  

Property owners can use a Declaration of Trust to formally specify different profit shares than the legal ownership shares. This is particularly useful in situations where individuals contribute differently to the purchase price or expenses but wish to allocate profits in a specific manner.

Transferring property ownership to a limited company can offer new opportunities for profit apportionment. Profits after corporate expenses and taxes can be distributed as dividends, which can be allocated in varying amounts to shareholders, offering some flexibility, similar to the FHL arrangement.

While general partnership rules apply, carefully drafted partnership agreements can specify profit-sharing arrangements that don't necessarily match the partners' capital contributions. This requires clear agreements and may have implications for self-assessment tax returns.

For property owners working on specific projects together, a joint venture agreement can outline specific profit-sharing terms. These agreements offer flexibility and can be tailored to the venture's unique circumstances.

Placing property in a trust can provide flexible profit distribution options. The trustees can allocate income to beneficiaries according to the trust's terms, potentially allowing for strategic tax planning based on the beneficiaries' tax situations.

Mortgage interest

FHL owners can fully deduct mortgage interest and other finance costs directly from their rental income, offering a straightforward way to reduce taxable profits. This treatment has been particularly beneficial for higher and additional rate taxpayers.

For non-FHL properties, the tax treatment of mortgage interest has evolved, particularly following the introduction of Section 24 of the Finance (No. 2) Act 2015. This change has phased out the ability to deduct mortgage interest from rental income, replacing it with a tax credit system.

Landlords receive a tax credit worth 20% of their mortgage interest costs, regardless of their income tax band. This means that higher and additional rate taxpayers no longer receive full relief on finance costs at their marginal tax rates, potentially leading to higher effective tax liabilities on rental income.

Some landlords have explored incorporating their rental businesses, transferring property ownership to a limited company. Within a company, finance costs can still be deducted from rental income before calculating profits subject to Corporation Tax. However, this approach requires careful consideration of the additional responsibilities, costs, and tax implications of running a limited company.

Pension contributions

FHL owners benefit from being able to use their rental income as a basis for pension contributions. As the income from FHLs is treated as earned income, it is eligible for tax relief at the owner's highest rate of income tax when contributed to a pension scheme.

For non-FHL properties, rental income is classified differently and does not count as "relevant earnings" for pension contribution purposes. This distinction limits the direct tax relief benefits that property owners can leverage for their pension contributions, as only earned income (e.g., salaries or profits from a trade or profession) qualifies for pension tax relief.

Individuals who have other sources of earned income, in addition to property rental income, can continue to make pension contributions based on this earned income. This approach ensures they still receive tax relief at their marginal rate on contributions up to the annual allowance.

For those considering or already operating their property rental business within a limited company, it's possible to make employer pension contributions directly from the company. These contributions are usually allowable business expenses that can reduce the company's Corporation Tax liability. This approach requires careful planning to ensure compliance with regulations.

Losses

Losses generated by a FHL business can be carried forward to offset against future profits from the same FHL business.

Owners of properties not qualifying for the FHL scheme are subject to different rules regarding the treatment of property losses. Unlike the FHL scheme, where losses can only be carried forward and offset against future FHL profits, non-FHL property owners have a bit more flexibility in how they can manage their property losses.

Owners of multiple rental properties can offset the loss from one property against profits from other rental properties in the same tax year. This consolidation can help reduce the overall taxable income from property rentals.

Like FHL properties, owners can carry forward losses and offset them against future profits from their rental properties. This does not need to be against the same property that incurred the loss.

Seek advice from an expert

The abolition of FHL tax benefits requires proactive planning and adaptation. By exploring alternative tax strategies, maximising available reliefs, and adjusting property management practices, owners can navigate the transition effectively. It's recommended to consult with tax professionals to tailor strategies to individual circumstances and stay informed of any further legislative updates.