Furnished holiday let tax changes 

If you run a holiday let business then this article is for you.  There are major tax changes coming which you need to be aware of, and plan ahead for.

The government announced during the Spring Budget in March 2024 that it would be abolishing the Furnished Holiday Lettings (FHLs) tax regime from 6^th April 2025 (1^st April 2025 for limited companies).  This change will effectively end the advantageous tax treatment of holiday lets, in comparison to other property income like long term rental.

When the changes come in, income and gains from FHLs will receive the same tax treatment as all other property income and gains.

The main areas of change are listed below, explaining the current rules along with the new changes.  I have tried to make this as jargon free as possible,which is hard in a very tax technical area.  If you are unsure about anything please reach out to your accounant and discuss how you think these changes might affect your own circumstances.

Capital allowances (CA)

Current rules

Currently, purchases of equipment like beds, furniture, hot tubs etc which are used in the FHL trade are usually eligible for tax relief under the capital allowances scheme.

New rules

CA will no longer exist. This is the current situation for longer term property rental.  The only tax relief will be on ‘replacement of domestic items’.  See HMRC Link here which lists out some items, and as you will see it is very narrow.  Note also it’s replacement only, not the initial purchase of them if you have a new property you are furnishing.

Capital gains (sale of property)

Current rules

When a FHL is sold, currently there are various tax reliefs available against any gain made.  BADR means the gain would be taxed at 10%, and there are other reliefs where if you purchased another business asset, you could rollover the gain into that new business.  Gift relief also exists whereby the gain is pushed down the road via holdover relief.

New rules

All of the above will no longer exist so gains would be taxed at the rate of either 18% or 24% for sole traders/partnerships (depending on income levels) or between 19-25% for companies.

VAT

Current rules

At the moment FHL income is classed as turnover for VAT purposes.  Other propery rental is not.

New rules

No changes.  FHL income will still be subject to VAT if VAT threshold is breached.

Pensions

Current rules

FHL earnings is currently classed as ‘relevant earnings’ for pension purposes.  This means up to 100% of FHL earnings can be paid into a personal pension by an individual or sole trader, and get tax relief on these.

New rules

FHL earnings will no longer be included as relevant earnings.  This means if you have no other income, tax relief would only be given on a contribution of £2,800.

Finance costs

Current rules

If you have a loan or mortgage over a FHL property you currently get 100% tax relief on the interest element.

New rules

Tax relief on interest paid will be restricted to the basic rate of 20%.

Things to consider

This all happens from April 2025.  What do you need to think about before then, and discuss with your accountant?

• Can you accelerate any planned investment in equipment or repair work which isn’t domestic items? For example, if a hot tub is on your radar for next year, try and buy it before end of March 2025 to get the tax relief under the capital allowances scheme.
• Might you have any unclaimed capital allowances from when you purchased the property?
• Can you accelerate any planned pension contributions to get the full tax relief?
• If you are planning sell in the immediate future, do you need to consider bringing that forward to pay lower tax on the gain? Note there are what is called ‘anti-forestalling’ rules here to avoid people selling before April 2025 using unconditional contracts.  This is definitely one to discuss with your accountant.
• Think longer term. Is the business viable without the tax reliefs above? Would a change to anther business model suit better, like long term property rental?
• The Association of Scottish Self Caterers (ASSC) are doing a lot of work at the moment around these changes.  There is a petition they are running at the moment to try and get in front of UK Government.  The link is here to sign the petition if you feel like doing so.  These tax changes will have a significant impact on many self catering businesses in our area, not to mention other businesses who thrive off the self catering industry.  Rural communities are not being considered when these new policies are being made.

If you want to discuss anything in this article please don’t hesitate to get in touch.