Among the announcements in the Spring 2024 Budget earlier this month was the decision to abolish the Furnished Holiday Let (FHL). This means the loss of tax breaks for that type of rental business.
Did you watch the Chancellor’s budget speech? During the speech, he mentioned Hon Members from St Austell and Newquay, North Devon, Torbay, Truro, and Falmouth, all beautiful holiday spots in the South-West.
The Chancellor expressed concern that the current tax incentives for Furnished Holiday Lets (FHL) were distorting the property market in holiday hot spots across Britain. This makes it difficult for residents to purchase properties in their local area. To make the tax regime work better for the benefit of local people, he abolished the FHL tax incentives and related tax breaks.
What is a FHL
A FHL typically refers to a short-term rental property that is available in the holiday market.
For a property to qualify as a FHL it must meet the following criteria:
- The property must be available for 210 days
- The property must be let for at least 105 days
- Long-term lets (31 + days) must not exceed 155 days a year.
There are a few other conditions attached to letting out your property as a FHL. However, if you do meet those conditions then there are some very favourable tax breaks available to you now.
What are the tax breaks?
By removing the FHL category altogether, all the tax incentives disappear. What this will mean going forward is a larger proportion of your income from holiday lets will be subject to tax.
The specific tax advantages that will be lost are:
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Mortgage interest relief
Mortgage interest relief for all individual landlords has been restricted to 20% unless of course, your property is a FHL. From 6th April 2025, interest will cease to be a tax deduction and relief will be given via a 20% tax credit. You claim this tax credit via self-assessment.
For higher rate taxpayers this will mean an increase in the overall tax liability.
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Ability to claim capital allowances
HM Revenue & Customs are currently treating all qualifying FHL as a business and not an investment. This means that you can claim capital allowances for the big-ticket items such as say television or dishwasher.
After 5th April 2025, you will no longer be claiming capital allowances which gives you tax relief over the life of the asset. You’ll most likely be able to claim full allowance in the year of purchase.
However, what this means is there will be legacy allowances to take care of and this will be done via your self-assessment.
This is an early warning if you are going to be doing your own self-assessment.
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Capital Gains Tax (CGT) relief
In recent years, many landlords have chosen to exit the property market due to the reduction in mortgage interest relief and higher interest rates.
However, what is holding some landlords back is the CGT on any gains they may make.
Gains on the disposal of a FHL will currently qualify for a business rollover relief. Business Asset Rollover Relief is available if you sell a business asset (in this case your FHL) and invest some or part of the proceeds to buy new business asset.
Capital Gains on the disposal of the FHL assets may also qualify for the Business Asset Disposal Relief which means gains will be taxed at 10%. This is a very attractive rate enjoyed only by business owners.
FHL will only be an investment property after April 2025, losing favourable CGT rates.
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Net Relevant Earnings for pension relief
Currently, your profits from a FHL count as relevant earnings to support the tax relief into your pension scheme. You can get tax relief on your pension contributions up to the lower of:
- 100% of your earnings from trade
- Annual allowance of £60,000
It maybe you need to speak to your financial advisor if you are planning to make large pension contributions over the next few years.
What should you do next?
You have around a year to plan as the changes come into place from 6th April 2025.
If you are running a Furnished Holiday Letting (FHL), you may have some concerns. The removal of full interest relief on your mortgage will affect your cash flow.
If you want to sell your FHL, timing is going to be imperative to get the most of the CGT reliefs.
We recommend you consult with your accountant as soon as possible to determine the best course of action.
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The Chancellor’s decision to abolish the FHL category will make it less attractive to hold holiday lets and more appealing to sell them. The motive behind this move is to enable local residents in popular holiday destinations to own their properties without being priced out of the market. We’ll have to wait and see how this decision impacts the industry.