The FHL regime is coming to an end: what this means for property owners

The recent confirmation of the abolishment of the Furnished Holiday Lettings (FHL) regime has brought significant changes for property owners to consider. It was announced by then-chancellor, Jeremy Hunt, in the 2024 Spring Budget, that the FHL regime will officially end from 6 April 2025 for Income Tax and Capital Gains tax and from 1 April 2025 for Corporation Tax. At the end of July, draft legislation was released alongside information about the anti-forestalling rule and explanatory note, providing further details on the upcoming adjustments and how property owners should prepare for the transition.

The FHL regime currently treats eligible short-term residential lettings as a trade and this provides advantageous tax benefits for furnished holiday lets:

• Exemption from finance cost restriction rules, which restrict loan interest to the basic rate of Income Tax for other landlords.
• Favourable capital allowances, providing enhanced tax reliefs
• Access to reliefs from taxes on chargeable gains for trading business assets
• Inclusion as relevant UK earning when calculating maximum pension relief

What changes will occur?

• Implementation of finance cost restrictions, limiting the deduction of loan interest to the basic rate of Income Tax.
• Replacement of the current Capital Allowances for new expenditures with the ‘replacement of domestic items relief’
• No access to reliefs on chargeable gains typically available to trading business assets
• Exclusion of income counted as relevant UK earnings for the purpose of calculating maximum pension contributions.

What transitional rules are in place to ease the shift?

Capital Allowances

With the abolition of the FHL regime, properties will no longer benefit from the advantageous capital allowances treatment they currently have. Instead, they will be eligible for the ‘replacement of domestic items relief’, similar to other property businesses. However, if an FHL business has an existing Capital Allowances pool, they can continue to claim writing-down allowances on this pool. Any new capital expenditures incurred after the operative date must be considered under the standard property business rules.

Treatment of Losses

Currently, losses form an FHL property business can only be carried forward and offset against future profits from the same FHL business. After the regime is abolished, former FHL properties will be incorporated into the owner’s overall UK or overseas property business. This means that profits and losses from all properties within that business will be amalgamated, allowing greater flexibility in offsetting losses.

Capital Gains Relief

Under the existing rules, FHL properties benefit from several tax reliefs, including Business Asset Disposal Relief (BADR), Roll-Over Relief, Gift Relief, and Relief for Loans to Traders. BADR is particularly advantageous, as it allows qualifying lifetime gains up to £1 million to be taxed at a reduced rate of 10%, rather than the higher residential property rates. However, with the abolition of the FHL regime from 6 April 2025, these reliefs will no longer be available, and gains from the sale of FHL properties will be taxed at the standard residential property CGT rates.

Despite these changes, there is an exception for BADR: if the FHL conditions were met and the business ceased before the rule changes take effect, the relief may still apply to a disposal within the typical three-year period following cessation. This means that while the regime’s benefits are ending, some owners may still be able to take advantage of BADR for a limited time.

An anti-forestalling rule was implemented earlier this year to prevent the use of unconditional contracts to obtain CGT reliefs under the current rules.

Pension Contributions

Tax relief for pension contributions is limited to the higher of £3,600 or 100% of net ‘relevant earnings’. From April 2025, FHL profits will no longer be treated as relevant earnings.

How can we help you

With indications that Labour support the Spring Budget proposal, it’s important for you to evaluate how these changes may affect your FHL business from April 2025. Our tax department is here to help you navigate these updates and identify potential opportunities for tax reliefs.

If you would like to talk to a team member about how the abolition of the FHL regime could impact you, or if you would like to discuss your options, please get in touch today.

Email: [email protected]

Phone: 01926 422292