The UK government has announced draft legislation to repeal the special tax treatment for furnished holiday lettings (FHL), with changes coming into effect on 6 April 2025 for individuals and 1 April 2025 for corporation tax. This shift will eliminate several tax advantages currently available to FHL landlords, aligning them with the rules applicable to other property businesses.
Key Changes to VAT on Furnished Holiday Lettings
- Finance Cost Restrictions:
- From April 2025, loan interest on FHL properties will be subject to the basic rate of Income Tax. This change aligns FHLs with other property businesses under the new VAT on private school fees 2025 rules.
- Capital Allowances:
- The new legislation will abolish capital allowances for new expenditures on FHL properties, only allowing relief for replacement domestic items. Existing capital allowances pools can still be claimed, but any new expenditure incurred from the effective date will follow standard property business rules.
- Reliefs on Chargeable Gains:
- The proposed repeal will withdraw access to tax reliefs on chargeable gains for trading business assets. This includes the cessation of eligibility for Capital Gains Tax (CGT) roll-over relief, business asset disposal relief, and other related exemptions from 6 April 2025.
- Pension Relief Calculations:
- Income from former FHL properties will no longer be considered in relevant UK earnings when calculating maximum pension relief, affecting how pension contributions are calculated.
Transitional Rules and Planning
- Ongoing Capital Allowances: Existing FHL businesses can continue to claim writing-down allowances on their current capital allowances pool. New expenditure from the effective date will need to be considered under the general property business rules.
- Integration into Property Businesses: After the repeal, former FHL properties will become part of the owner’s UK or overseas property business, integrating profits and losses from all properties within that business.
- Carried Forward Losses: Losses from the FHL business can be carried forward and used against future profits of either the UK or overseas property business, providing some relief during the transition.
- Anti-Forestalling Rule: Effective from 6 March 2024, an anti-forestalling rule will prevent tax advantages through unconditional contracts designed to secure capital gains relief under the current FHL rules.
How These Changes Affect You
The repeal of special tax treatment for FHLs will standardise tax rules, impacting financial benefits previously enjoyed by FHL landlords. It is crucial for property owners and investors to:
- Review Tax Strategies: Assess how the removal of FHL tax advantages will affect your financial planning.
- Adjust Financial Forecasts: Prepare for changes in capital allowances and reliefs under the new rules.
- Seek Professional Advice: Consult with tax experts to navigate these transitions and optimise your tax position effectively.
Stay Informed
We will provide further updates as more details emerge. Keep up to date with the latest changes to ensure you’re prepared for the impact on your FHL properties.
Need more information?
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