Furnished Holiday Lettings: Key Tax Changes You Need to Know

Understanding the Changes in Furnished Holiday Lettings (FHL) Tax Legislation

The UK government has issued updated guidance on the repeal of tax rules for Furnished Holiday Lettings (FHLs), impacting the tax treatment of FHL income and previously available reliefs. Here’s a breakdown of the key changes for individuals and companies operating FHLs and how these may affect your property tax planning.

1. What is Changing?

• Removal of FHL Tax Reliefs: Previously, FHLs benefited from specific tax reliefs, such as capital allowances on fixtures, furniture, and fittings, and more favourable rules for finance and mortgage interest deductions. Under the new rules, these reliefs will be discontinued, and FHL income will be subject to the same tax treatment as other property income, regardless of whether you continue to operate as a holiday let or switch to long-term rental. This means:
• Capital Allowances: Owners will no longer be able to claim capital allowances for fixtures, furniture, and furnishings. Instead, Replacement of Domestic Items Relief will apply to qualifying replacement items.
• Finance and Mortgage Interest Relief: Finance costs will now be limited to the basic rate of income tax at 20% for individuals, consistent with other property owners. However, companies will still be exempt from finance cost restriction rules.

2. VAT, Expenses, and Other Taxes

• VAT: The VAT treatment remains unchanged; holiday accommodation will continue to be standard-rated for VAT purposes.
• Claiming Expenses: Revenue expenses, including utilities, repairs, and consumables, can still be deducted from income as they were before.
• Council Tax and Business Rates: The repeal of the FHL tax reliefs does not affect council tax and business rate rules. Business rates may apply to certain properties depending on criteria set by devolved authorities across the UK.

3. Capital Gains Tax (CGT) and Losses

• Capital Gains Tax Anti-Forestalling Rule: Capital Gains Tax reliefs, such as rollover relief, gift relief, and Business Asset Disposal Relief, will no longer apply to assets disposed of after 6 April 2025 unless certain conditions are met. This change prevents avoidance of the new rules by signing early contracts.
• Handling Losses: Any losses incurred in the 2024-25 tax year or carried forward from previous years will now be treated as general property business losses. For individuals, these losses can be offset against other property income in subsequent years, while companies may set them against other types of income.

4. Property Income and Jointly Held Property

• Income Classification: With the repeal of the FHL provisions, income from holiday lets will be treated as property income, rather than trading income, even if the activities closely resemble a business. This change ensures consistency across all property types in terms of tax treatment.
• Joint Property Ownership: For jointly owned properties, income is generally divided according to ownership shares, although joint owners can agree on different profit-sharing arrangements. For married couples or civil partners, profits are split equally unless Form 17 is submitted to HMRC within 60 days, declaring unequal ownership and income shares.

5. Other Considerations

• Class 2 NIC Eligibility: Eligibility to pay voluntary Class 2 or Class 3 National Insurance contributions remains unaffected by the repeal. For further information, consult the official guidance on National Insurance contributions for landlords.

Conclusion
The repeal of FHL-specific tax reliefs represents a significant change for holiday let owners across the UK. Whether you continue with holiday letting or move to long-term rentals, the shift to standard property tax rules makes it important to re-evaluate your tax strategy. For tailored advice on how these changes might affect your unique situation, please reach out to our team.

For more detailed information, visit the official GOV.UK page on FHL tax changes.