The unique and specific rules relating to the taxation of Furnished Holiday Lettings (FHL) offered some very generous tax relief for those operating a holiday rental business, providing they met some quite stringent qualifying conditions.
The previous Government announced the withdrawal of many of the tax breaks associated with this and the new government have confirmed they will proceed with these changes.
Although not yet law (and therefore subject to amendment) the new regime will take affect on or after 6 April 2025 for Income Tax and Capital Gains Tax and from 1 April 2025 for Corporation Tax and Corporation Tax on chargeable gains.
The current rules allowed beneficial tax relief in the following areas: –
- A deduction in full for mortgage interest without the restrictions that apply to other non FHL landlords.
- More beneficial capital allowance rules.
- Potential Capital Gains Tax relief on the sale for the property business assets.
- Inclusion as relevant earnings for pension purposes.
To qualify as a FHL the property in question needed to be:
- Let on a commercial basis.
- Available for short-term letting to the public for 210 days in a tax year and actually let for 105 days or more each tax year.
- Not let for as a long term let of over 31 days for significant periods.
The proposed changes to the rules are as follows: –
- Applying the finance cost restriction so that only basic rate tax relief for Income Tax is available on mortgage interest payments.
- Removing capital allowance rules for new expenditure and allowing replacement of domestic items relief.
- Withdrawing the possibility of business asset disposal relief on the disposal of trading business assets.
- No longer including this income as relevant earnings for pension purposes.
After the introduction of the new rules the FHL will form part of a landlord’s normal rental business. Transitional rules will apply to FHL properties to aid this change. Anti forestalling rules will apply to prevent a landlord from selling under an unconditional contract to obtain capital gains reliefs before April 2025. This rule applies from 6 March 2024.
This could have an impact on the property market in holiday hotspots as landlords perhaps look to sell up before next April. This could also lead to less holiday homes being available but, on the flipside, maybe more properties available to locals, who have often been priced out of the market – although this does not mean they will be able to afford the properties any more than they can now!
To talk through these new rules and discuss how they may affect you, please speak to your usual contact at Beavis Morgan or Neal Groves or Joanne Holland who will be able to assist.