Taxation of Furnished Holiday Lettings

– Interest incurred on borrowings is fully deductible against taxable profits.

– Beneficial capital allowances rules allowing tax relief for fixtures.

– Various capital gains tax reliefs, including potential for business asset disposal relief (10% rate on sale), rollover relief and gifts hold-over relief.

– Profits from FHLs can be treated as relevant earnings for pension purposes.

– Income from a FHL held jointly by a married couple or civil partners is not caught by the default 50:50 split for income tax purposes.

Income and gains from FHLs will be considered as part of the owner’s property business and receive the same tax treatment as all other property income and gains. The specific changes include:

– Loan interest will be restricted to the basic rate of Income Tax, as finance cost restriction rules will now apply for FHLs.

– Capital allowances will no longer be available for new expenditure.

– FHLs will become eligible for replacement of domestic items relief in line with other property businesses.

– No more access to tax relief on eligible gains for trading business assets.

– Income generated from FHLs will no longer be considered within relevant UK earnings when maximum pension relief is calculated.

The changes above will affect any person, business or trust that operates or sells accommodation classified as FHL.

The holiday let changes will take effect from 6^th April 2025 for those paying Income Tax, and 1^st April 2025 for those paying Corporation Tax. The FHL tax regime will be abolished on these dates.

While the new rules for holiday lets will not take effect until next year, transitional rules have been introduced for FHLs:

• Capital allowances – Expenditure on holiday lets will not qualify for capital allowances under the new rules, in line with the standard property business rules. However, capital allowances claims that have been made prior to the abolition dates can continue to be claimed over time.

• Loss carry forward – At present, losses from FHLs can only be offset against future FHL profits. These losses can be carried forward and offset against future profits from the owner’s overall UK or overseas property business.

• Tax reliefs – Under the current rules, FHLs qualify for reliefs such as roll-over relief, business asset disposal relief and gift relief. These reliefs will cease from 6^th April 2025, however, existing qualifications for these reliefs, where conditions are met before the changes, will remain unaffected.

• Business Asset Disposal Relief – For BADR specifically, if the FHL business ceased before the change implementation date, the 3-year relief period will still apply.

• Anti-forestalling rule – To prevent capitalising on tax advantages through early property sales, an anti-forestalling rule has been introduced, which has been effective since 6^th March 2024.

The new rules for holiday lets will see the Furnished Holiday Lettings tax regime abolished, which means that landlords who provide short-term holiday lets will no longer be able to access tax benefits relating to their accommodation.

As FHLs will be treated the same as other property businesses from a tax perspective, the new rules should simplify the reporting process for anyone receiving income from both holiday lets and other property.

The abolition of the Furnished Holiday Lettings tax regime also means that this is your last chance to claim capital allowances for historic expenditure on holiday lets. Now is the time to make sure you have claimed the tax relief you are entitled to on any fit-out and refurbishment expenditure.

It may also be possible to claim capital allowances on the original acquisition of the property being used as a holiday let.

In addition to evaluating your capital allowances eligibility, consideration of the wider tax implications of the new rules for holiday lets is also required.

Should you require any more information or advice contact Verallo on 0203 912 9933 or info@verallo.com.