Check-out time looms for FHL tax regime
Further to our article in December 2024 and with the tax regime for furnished holiday lettings ending in April 2025, there are practical issues that affected property owners need to know about.
The beneficial tax treatments associated with furnished holiday lettings (FHLs) will disappear with effect from 6 April 2025 (or 1 April for corporate FHL landlords).
The Old Regime
Under the old regime, landlords letting furnished holiday accommodation on a commercial basis benefited from more favourable tax rules to those landlords letting on longer term residential lets. Landlords were able to access various capital gains tax reliefs available to traders, The interest relief restriction did not apply to FHLs with interest and finance costs being allowed in full, capital allowances were available to FHL landlords and the profits of an FHL business counted as relevant earnings for pension purposes.
To qualify for this regime, the property had to be in the UK or EEA and had to be let on a commercial basis. There were various tests which had to be met covering days actually let and days available to let.
The New Regime
From 6 April 2025, the FHL regime will be repealed, and all property income from both FHLs and normal residential letting will be treated the same as one ‘Property Business’ either a single UK business or a single overseas business.
FHL landlords will no longer be able to deduct interest and financial costs when calculating their taxable profits. Instead, they will receive relief as an income tax reduction of up to 20% (capped at the amount of the tax). Any unrelieved amounts can however be carried forward for relief in later tax years.
FHL landlords will no longer be able to claim capital allowances on such domestic items as appliances, furniture and furnishings. Instead, from 6 April 2025, relief will be given when the items are replaced, providing a deduction for the cost of a like-for-like replacement. Initial purchases of such items do not receive any relief; it is only the replacement of the items that receive the relief as with landlords letting property outside the FHL regime. However, current capital allowance pools will still be allowed to carry on past 5 April 2025, but no further purchases can be added.
The capital gains tax reliefs currently afforded to FHL businesses are valuable, particularly Business Asset Disposal Relief (BADR) on the disposal of the business, reducing the rate at which capital gains tax is charged to 10% compared to the top rate of 24% otherwise used where income and gains exceed the basic rate band. Now, where the date of cessation of the business and sale of property is after 6 April 2025, the normal rates of capital gains tax on residential property will apply being 18% and 24%. There are transitional rules available preserving BADR where the business ceased before 6 April 2025, but the property sold within three years of the date of cessation.
Where a disposal of an FHL business is being considered and there are gains within the property portfolio, the landlord may consider ceasing all their FHL business before 6 April 2025 to preserve access to BADR. This could save up to £14,000 in tax in every £100,000 of gain if they are thinking of exiting the industry soon.
FHL landlords also benefited from capital gains tax roll-over relief and gift hold-over relief preventing the immediate capital gain being charged, delaying the point at which the charge crystalises. Both reliefs will be lost under the new regime. An anti-forestalling rule will be introduced to counter attempts to retain access to the existing capital gains tax reliefs by the use of unconditional contracts.
FHL Profits will no longer count towards the landlords Net Relevant Earnings for pension contribution purposes thus reducing the ability to make tax relievable contributions.
The ability to relieve losses will also be affected. Currently losses can only be carried forward against profits from the same property business but from 6 April 2025, the profits and losses from the different types of let will be amalgamated, providing relief for losses on FHLs against profits from a normal residential let and vice versa. Unused FHL losses as at 5 April 2025 will have the ability to be carried forward and used against the profits of the amalgamated business.
Married / Joint owners and Form 17
Where property is owned jointly by cohabiting spouses or civil partners, any income arising from it is deemed for tax purposes to be split equally between the couple, regardless of their underlying beneficial ownership.
This deeming rule does not apply to FHLs. Instead, married / joint owners have more flexibility in allocating profits between them, which can reduce their combined tax liability if they pay different rates of tax. The agreed division of profits might be based on underlying beneficial ownership of the FHL, or who puts most work into running it.
From 6 April 2025, that flexibility will fall away. Unless action is taken, profits from former FHLs will be deemed split 50:50 between married co-owners, in the same way as profits from “ordinary” property lets.
Couples who want to split profits unequally from 2025/26 will only be able to do so if the proposed income split follows the actual underlying beneficial ownership of the property. For instance, if the tax efficient split is agreed as the husband gets 20% of the profits and the wife 80%, then they need to own the property in that ratio. They must also report this to HMRC by completing a form 17 on 6 April 2025 and
submitting it to HMRC within 60 days. The timing is critical, as forms signed before that date may not be accepted by HMRC, and form 17 cannot be backdated.
Form 17 can only be used to reflect the actual underlying beneficial ownership of the property – couples cannot just pick any desired split. Evidence of the unequal ownership declared has to be submitted to HMRC along with the Form 17.
Married couples / civil partners holding a property as joint tenants but currently reporting profits unequally will need to sever their joint tenancy and hold the property as unequal tenants in common. Legal advice is likely to be needed here as there may be unintended consequences to mortgages and SDLT /LTT charges on any ownership changes. They can then complete form 17 based on unequal ownership agreed, and submit it to HMRC with the necessary evidence (such as a declaration of trust).
While the loss of the tax advantages is a blow to FHL landlords, there may be some positives too. The current FHL rules impose strict occupancy and availability tests which will no longer need to be met under the new regime providing landlords with much more flexibility as to how they use their property, allowing more personal use or say letting as an FHL in the summer months and on longer term lets over the winter or off season. The ability to relieve losses against other types of letting may also be of benefit.
Some treatments of the FHL will not be changing, namely the VAT treatment, business rates and some business reliefs for Inheritance Tax.
If you would like any advice regarding Furnished Holiday Lets then please get in touch with your Tax Clerk or Partner.
