Changes to the Furnished Holiday Let (FHL) tax regime: An explainer

At Monahans, we know how difficult it can be to cut through the noise of complex budget announcements and decipher what changes will impact you and your finances, so we have created several resources to help.

Our Spring Budget 2024: Summary and Key Announcements PDF and Spring Budget article outline the major changes to be aware of, whilst our 2024/25 Tax Guide contains up-to-date tax information and guidance, giving you all the key numbers in one place.

But if you are still unsure as to the steps that you may need to take, or how this announcement may impact your finances in the year ahead, do not hesitate to get in touch. The most recent budget announcement included significant changes to the Furnished Holiday Let (FHL) tax regime. We explore the details announced and how you can best prepare.

What was announced?
As part of this year’s Spring Budget, the government announced the abolition of the Furnished Holiday Let (FHL) tax regime from April 2025.

In addition, it was announced that an anti-forestalling rule will apply from 6 March 2024 in relation to unconditional contracts, in order to prevent people from using these contracts to access the beneficial capital gains tax treatment.

A furnished holiday let (FHL) is a type of short-term rental property. To qualify as one, HMRC states that your property must be:

• Situated in the UK or European Economic Area (EEA)
• Furnished
• Commercially let out (you must intend to make a profit)

In addition to this:

• The property must be available for letting for 210 days a year
• It must actually be let for 105 days a year (the let days test)
• The property must not normally be let for periods of more than 31 consecutive days to the same person, but if it is, those let days do not count towards the number of let days referred to above.
• The total of all lettings which exceed 31 days also can’t exceed 155 days.

There are two elections that can be made to reach the let days test, if not automatically reached. Where more than one FHL property is let in a year, an averaging election can be made to average the occupancy for all the properties that are let as FHLs. Alternatively, if a property meets the letting condition in some years but not others, a period of grace election may be made in certain circumstances.

So, what has changed?
Currently, FHLs benefit from a range of beneficial tax rules including:

• The full amount of finance costs (such as mortgage interest) can be deducted from FHL income.
• Business Asset Disposal Relief (BADR) may be available on disposal of the FHL which results in a 10% capital gains tax rate applying.
• Profits from FHLs count as relevant earnings for pension purposes.
• Capital allowances on items such as furniture, fixtures and fittings can be claimed against the rental income.

The government’s announcement means that the favourable tax treatments that FHLs currently benefit from will be abolished from 6 April 2025.

This change will remove tax advantages from those who let short-term furnished holiday properties over those who let residential properties to longer-term tenants, which the government claims will ‘support people to live in their local area’.

An estimated 127,000 properties in the UK are registered under the FHL regime and will therefore be impacted by this change.

Which taxes will be affected?
Income Tax
The tax position for those who have FHL will be impacted in various ways. For example, the restriction of the mortgage interest may result in an increased amount of tax payable.

In addition, as income will no longer count as relevant earnings for pension purposes, the amount that people can contribute to their pensions and receive tax relief on, may be reduced, which will also impact an individual’s tax position.

Capital Allowances
The capital allowance changes may also result in a reduction in the level of expenditure on furniture and fittings that can be deducted for tax purposes, which could cause an increase in the overall tax payable.

It is not yet clear what will happen to the capital allowances previously claimed under these new rules, but we will keep our clients updated as further details are released.

Capital Gains Tax
Until now, if a property qualified as an FHL, tax has been payable at a rate of 10% where Business Asset Disposal Relief (BADR) applies. Going forward, the property will be taxable at the residential property rates of 18% (basic rate) and 24% (higher rate).

It is also important to be aware of the 60-day reporting requirement to declare and pay any relevant capital gains tax due.

In addition, individuals previously had an option to ‘rollover’ disposals into FHL to prevent capital gains tax from being immediately payable and to open up potential gifting options for these types of properties. But this benefit will also be removed going forward. Guidance has not yet been released on any impacts on gains already rolled into FHLs, but we will keep our clients up to date on any announcements around this.

The anti-forestalling rule
We are expecting to see draft legislation published in due course which will include an anti-forestalling rule. This will prevent individuals from obtaining a tax advantage by using unconditional contracts to obtain capital gains relief under the current FHL rules. This rule will apply from 6 March 2024, and we are currently waiting for further guidance to be published by the government.

So, what should clients do?
We would always recommend seeking professional advice from an advisor who can help you to navigate the potential short- and long-term implications of new government legislation and support you in finding solutions that holistically consider your entire financial situation.

Following this announcement there are a few key aspects to consider, including:

• Your taxation position – it’s crucial to seek guidance as to how these changes may impact your tax position going forward and to ensure that you have a full understanding of the rules before they come into play.

• Letting – you may decide to move from short- to long-term lettings as the tax benefits of FHL will no longer apply. It's therefore crucial to ensure that you are aware of the tax consequences of this and other implications.

• Property sales – you may consider selling your properties due to changes in rules. If so, it is essential to seek advice as to the reporting and taxation requirements that will be needed.

• Property purchases - if you are planning to purchase a FHL, being aware of these upcoming changes and the removal of the tax breaks going forward will be critical to your decision. Particularly if you were planning on ‘rolling-over’ into the FHL.

For more information on the FHL tax changes get in touch with the team today or visit point 2.7 on the GOV.UK budget breakdown page.

Jessica Long