Abolition of the Furnished Holiday Let tax regime (FHL): what you need to know.

Effective April 2025, the UK government will abolish the Furnished Holiday Lettings (FHL) tax regime, fundamentally altering the tax landscape for property owners engaged in short-term holiday rentals. This policy change aims to level the playing field between short-term holiday let landlords and traditional residential property landlords.

Background of the FHL Regime

Introduced in 1984, the FHL tax regime was designed to boost the UK tourism industry by offering favorable tax treatments to landlords of qualifying furnished holiday accommodations. Properties meeting specific criteria—such as being available for letting at least 210 days per year and actually let for 105 days—enjoyed benefits including full mortgage interest relief, eligibility to claim capital allowances on furnishings, and access to certain Capital Gains Tax (CGT) reliefs. These advantages positioned FHLs favourably compared to standard residential lettings.

Key Changes Effective April 2025

The abolition of the FHL tax regime will introduce several significant changes:

1. Restriction on Mortgage Interest Relief: Currently, FHL landlords can deduct the full amount of mortgage interest from their rental income. Post-abolition, this relief will be restricted to the basic rate of Income Tax, aligning FHLs with other residential property businesses.
2. Changes to Capital Allowances: FHL landlords have been able to claim capital allowances on expenditures for furnishings and equipment. With the regime's repeal, new expenditures will no longer qualify for capital allowances. Instead, landlords can claim relief under the 'replacement of domestic items' scheme, similar to other residential property lettings. Existing capital allowance pools can continue to receive writing-down allowances, but no new claims can be made post-abolition.
3. Capital Gains Tax Reliefs: Previously, FHL properties qualified for certain CGT reliefs available to trading businesses, such as Business Asset Disposal Relief (formerly Entrepreneurs' Relief) and rollover relief. These reliefs will no longer be accessible for disposals occurring after the regime ends. Landlords considering the sale or transfer of their properties may need to act before April 2025 to benefit from existing reliefs.
4. Pension Contribution Implications: Income from FHLs has been treated as 'relevant earnings,' allowing landlords to make tax-advantaged pension contributions. Post-abolition, this income will no longer qualify, potentially reducing the amount landlords can contribute to pensions with tax relief.

Transitional Considerations

The government has outlined specific transitional provisions:

• Capital Allowance Pools: Existing capital allowance pools as of April 2025 can continue to receive writing-down allowances. However, any new expenditure incurred on or after this date must be treated under the standard property business rules, which do not permit capital allowance claims.
• Unrelieved Losses: Any unrelieved losses from the FHL business can be carried forward and offset against future profits of the same property business, ensuring that past investments are not unduly penalized.

Implications for Property Owners

The repeal of the FHL regime necessitates strategic planning for affected landlords:

• Review Financial Projections: Landlords should reassess their financial models to account for the reduced tax relief on mortgage interest and the inability to claim capital allowances on new expenditures.
• Consider Timing of Capital Expenditures: To maximize tax efficiency, landlords may opt to advance planned capital expenditures before April 2025 to take advantage of current allowances.
• Evaluate Property Portfolio: Given the impending changes, some landlords might consider restructuring their portfolios, potentially selling properties before the abolition to benefit from existing CGT reliefs.
• Pension Planning: With FHL income no longer qualifying as 'relevant earnings,' landlords should consult with financial advisors to adjust their pension contribution strategies accordingly.

Additional Considerations

Beyond the tax implications, landlords should be aware of concurrent regulatory changes:

• Council Tax Premiums: Starting April 2025, local councils in England will have the authority to impose up to a 100% council tax premium on second homes, potentially doubling the council tax liability for properties not occupied as a primary residence.
• Market Dynamics: The convergence of tax changes and increased regulatory scrutiny may influence property values and rental demand in traditional holiday hotspots. Landlords should stay informed about local market trends to make data-driven decisions.

Conclusion

The forthcoming abolition of the Furnished Holiday Lettings tax regime marks a significant shift in the UK's property taxation landscape. Landlords engaged in short-term holiday lets must proactively assess and adapt their strategies to navigate these changes effectively. Consulting with tax professionals and financial advisors will be crucial to optimize outcomes and ensure compliance in this evolving environment.