Furnished holiday lets: what’s changing? 

It was announced in the Spring Budget that the tax-advantageous regime for furnished holiday lets (FHLs) will be abolished from April 2025.  The Chancellor is hoping that this change will encourage landlords to favour longer-term lettings over short-term vacation rentals.

With the rise of Airbnb-style short lets for a main or second home, many more property owners could be taking advantage of valuable FHL reliefs in the limited time remaining before the rules change.

There is a window of opportunity now to review property letting activity to take advantage of the key tax benefits available for qualifying rentals.

What qualifies as an FHL?

Where a property is available for commercial letting as holiday accommodation for 210 days in a tax year and actually let for at least 105 days in blocks of less than 31 days to the same person, it may qualify as an FHL.  For lettings that don’t quite meet the conditions, it is possible to elect to average lettings between more than one property or to apply a period of grace to treat the conditions as met in a slow year.

What are the tax advantages of the FHL regime?

Where a let qualifies, the tax advantages can be significant:

• Full deduction against income for interest on borrowings.
• Reliefs from capital gains tax, including business asset disposal relief (10% tax rate on sale), rollover relief and gift hold-over relief to defer gains.
• Profits treated as earnings for pension contribution purposes.
• Beneficial capital allowances rules for tax relief on fixtures.

If my property letting qualifies, what planning should I consider now?

For a sale of an FHL where contracts are exchanged before 5 April 2025, the first £1 million of gains may be subject to capital gains tax at 10% (where the lifetime limit has not been used elsewhere).  This compares favourably to the main rate of 24% for disposals of residential property from 6 April 2024 (28% previously).  It is expected that specific anti-avoidance will be enacted to prevent taxpayers taking advantage of these rules, but genuine disposals should still benefit.

Instead of a cash sale, you could consider a gift to children or grandchildren (or a gift into a trust where minors are involved) with the benefit of gift hold-over relief.  On making a claim, the capital gain which would otherwise be triggered on the disposal is deferred, so that the recipient is treated as taking on your tax base cost.  For inheritance tax, the gift will be potentially exempt at the time it is made and fully exempt after seven years, plus there is no stamp duty land tax payable on a gift.  Using this strategy before 5 April 2025, you will be able to pass a valuable income-producing asset to heirs free of tax.

FHL income can be added to earnings from other sources to enable property owners to take advantage of the increase in the pensions annual allowance to £60,000 for 2024/25 (lower annual limits apply to high earners, or for those who have already accessed pension savings). All pension contributions made by an individual or employer, plus basic rate tax relief added by the government, will count towards the annual allowance.  Tax relief is available on up to 100% of UK earnings. However, for director-shareholders, dividend income is not counted as “earnings” for pension contributions purposes, so FHL profits can be especially important in maximising tax relief for topping up pension contributions.

Reviewing possible claims for capital allowances to find missed reliefs can reduce FHL taxable profits.  Allowances are available for furniture, white goods and property fixtures; unlike standard buy-to-let properties, a deduction is available for initial expenditure and not only replacements and repairs.  There is no time limit for claiming capital allowances where the asset is still used in the FHL business, but the opportunity to claim will be withdrawn from April 2025.

This advice insight is indicative only and full tax advice should be sought on your specific circumstances.  Speak to Yvette Jacobs-Lee or your usual Moore Kingston Smith contact.