In recent years, the furnished holiday lettings (FHL) market has experienced a meteoric rise, largely thanks to platforms like Airbnb. However, this sector is set to face significant changes. From April 2025, the FHL tax regime will be abolished, removing the tax advantages that have made it a lucrative choice for property investors. FHLs will now be treated like other rental properties for tax purposes.

This blog highlights the key changes, their reasons, and their implications for property owners.

What are the criteria for Qualifying for a furnished holiday let?

To qualify as an FHL, your property must meet specific criteria:

1. Profit Intent: The property must be let to make a profit. Even if it doesn’t make a profit or is let out of season, it can still qualify as an FHL.
2. Furnishings: The property must be furnished for "normal occupation," with furniture available for guests during their stay.
3. Location: The property must be located in the UK or the European Economic Area (EEA), which includes Iceland, Liechtenstein, and Norway.

Why Are Changes Being Made to the FHL Tax Regime?

The abolition of the FHL tax regime was first announced in the Spring Budget 2024. Following a change in government in July 2024, the new Labour administration confirmed it would uphold the changes. This decision was further reinforced in the Autumn Budget, disappointing many existing FHL operators.

Previously, FHL owners benefited from tax breaks not available to long-term residential landlords. These included full mortgage interest deductions and advantageous capital gains tax rates. The upcoming changes aim to level the playing field between short-term holiday lets and long-term rentals.

What Are the New Tax Rules for Furnished Holiday Lettings?

From April 2025, the tax benefits previously enjoyed by FHL owners will be removed. Here’s a breakdown of the changes:

Income Tax

1. Mortgage Interest Deductions: Currently, FHL owners can fully deduct finance costs like mortgage interest from their property income. From April 2025, this will be capped at the basic rate of income tax (20%).
2. Profit Allocation for Joint Owners: Under the current rules, profits from jointly owned FHLs can be allocated based on which spouse operates the business, often resulting in better tax efficiency. This option will no longer be available from April 2025, potentially leading to higher tax bills.

Capital Allowances

1. New Expenditure: From April 2025, FHL owners will no longer be able to claim capital allowances on new expenditures, such as furnishings or fixtures.
2. Transitional Rules: Writing Down Allowances and balancing charges can continue to be claimed on pooled expenditures until the pool is exhausted or a small pool claim is made.

Capital Gains Tax (CGT) & Business Asset Disposal Relief (BADR)

1. Higher CGT Rates: The 10?DR rate on gains will be replaced by the standard CGT rate for residential properties, currently 24%.
2. Loss of Rollover Relief: The option to defer CGT by reinvesting profits into new business assets will cease.
3. No Transitional Rules: Gains on contracts exchanged after 6 March 2024 but completed after April 2025 will be subject to the new rules.

Pension Contributions and National Insurance

1. Pension Tax Relief: From April 2025, FHL income will no longer qualify as relevant UK earnings for pension tax relief purposes.
2. National Insurance Contributions: FHL income will also not count as relevant earnings for Class 2 and voluntary Class 3 NIC purposes.

Stamp Duty Land Tax (SDLT)

1. Higher Surcharge: From 31 October 2024, the SDLT surcharge on second properties, including FHLs, will increase from 3% to 5%.

Transitional Rules for FHL Owners

To ease the transition, certain rules will remain in place until April 2025:

1. Tax Reliefs: Current reliefs such as Business Asset Rollover Relief and Gift Holdover Relief will remain available until April 2025.
2. Capital Allowances: Claims made before April 2025 can continue over time.
3. Carried Forward Losses: Losses from FHLs can still be offset against future property profits.
4. Anti-Forestalling Provisions: These rules prevent owners from exploiting unconditional contracts to gain tax advantages under the current regime.

How Will These Changes Impact FHL Owners?

The removal of preferential tax incentives will significantly impact the profitability of FHL properties. Owners may face increased tax bills, reduced profits, and more limited tax planning options. Some may choose to leave the FHL market altogether, while others may integrate their FHLs into broader property portfolios.

For those who continue, the changes will simplify reporting processes by aligning FHLs with other rental properties.

What Can FHL Owners Do Before April 2025?

FHL owners can take steps to mitigate some of the financial impacts before the new rules come into effect:

1. Refinance Mortgages: Consider adjusting loan terms or reducing mortgage debt on FHLs.
2. Maximise Capital Allowances: Claim allowances on fit-out or refurbishment expenses before April 2025.
3. Consider Selling: If selling is part of your strategy, do so before April 2025 to benefit from the current 10% CGT rate.
4. Review Pension Contributions: With FHL profits no longer qualifying as relevant earnings, explore alternative funding sources for pensions.

How TVR Accountants Can Help

The abolition of the FHL tax regime presents a complex and challenging landscape for property owners. At TVR Accountants, we specialise in providing expert advice for property owners, including those impacted by the upcoming changes.

Our team can help you:

• Develop short- and long-term tax strategies.
• Maximise available tax reliefs before April 2025.
• Navigate the new tax rules effectively.

Whether you own one property or a portfolio, contact us today for personalised advice. Call us on 01284 332375 or email us at info@taxvatreturn.co.uk.

With the right guidance, you can adapt to these changes and safeguard your financial interests. Let TVR Accountants be your partner in guiding this new era of property taxation.