Insights

In yet another blow to property investors, the 2024 Spring Budget heralded the end of tax advantages to the furnished holiday lettings (FHL) tax regime. The changes remove tax efficiencies available to landlords who offer short term furnished holiday rentals, in comparison to traditional residential landlords. We do not yet know the full extent of the changes, but some landlords with significant mortgage financing on their properties may wish to consider their options sooner rather than later.

Why are the FHL rules changing?

Currently there are special rules in place for FHL properties which have made this segment of the property investment market one of the most tax efficient. This hinges on the treatment of FHLs as a trading business. Recommendations by the OTS (Office for Tax Simplification) highlighted that it would be prudent to remove the separate tax regime for furnished holiday lettings, and instead a new statutory ‘brightline’ test may be introduced for qualifying property businesses meeting a certain level of activity that entitle them to different tax advantages.

What are the key tax benefits currently available to FHL owners?

The tax advantages offered to FHL landlords stem from these property businesses being treated as a trading business rather than an investment and entitle their owners to the following tax reliefs:

• Mortgage interest deductible in full from taxable profits;
• Full expensing capital allowances for fixtures and fittings, e.g. kitchens, bathrooms, flooring and furniture;
• Qualification for BADR (business asset disposal relief) reducing capital gains tax to 10% on the sale of property;
• Availability of roll over relief if gains are reinvested in a qualifying business within certain deadlines;
• Availability of gift hold-over relief;
• Treatment of FHL profits as relevant earnings for pension purposes;

What are the new rules for FHL properties?

• Business asset disposal relief (BADR) is to be withdrawn for the disposal of qualifying FHL properties from 6 April 2025. This means that gains on a disposal will be taxed at standard capital gains tax rates for residential property; currently 28% for higher rate taxpayers, but reducing to 24% from 6 April 2024;

• Business asset rollover relief allowing gains to be reinvested in another qualifying asset (which could also have been another FHL property or trading premises) will be removed from 6 April 2025;

• Gift hold-over relief, allowing a gain made on gifting an FHL property to be held over will also no longer be available from 6 April 2025;

• Capital allowances for fixtures (e.g. fitted kitchens, sanitaryware, heating, plumbing, electrical and lighting) and furniture within a FHL property will be withdrawn from 6 April 2025. Very little information is currently available about how the rules will be applied in the future, and we will be monitoring for further developments.

Details of the ‘brightline’ test recommended by the OTS report have not yet been outlined. We expect it will be based on the property business owner being able to demonstrate that their primary business is the provision and management of multiple FHL properties. It is possible the new rules will have a qualification requirement of a minimum number of properties and include the removal of any personal use of a FHL to retain the tax relief advantages.

If you own a FHL property and think you might be adversely impacted by these changes or have any concerns, please contact partners@rjp.co.uk to discuss possible action.