In the 2024 Spring Budget, it was announced by the previous Government that the preferential tax treatment given to qualifying Furnished Holiday Let properties (FHL) would be withdrawn from 6 April 2025 onwards.

Historically there were significant tax advantages for FHLs, which have been blamed for disproportionately increasing property prices and rents in a number of coastal hotspots around the UK.

Subject to some other considerations, the main criteria to for a property to qualify as an FHL are as follows:

• It is available for letting for at least 210 days in the year,
• It must be rented out for at least 105 days in the year on a commercial basis, excluding any longer-term lets of 31 days or more,
• If there are longer-term lets of over 31 days, the total of these lets must not exceed 155 days in the year.

If a property met the conditions to qualify as an FHL, the tax benefits have included:

• The ability to claim capital allowances on qualifying plant and machinery used in the FHL business (such as furniture and electricals), meaning the cost of purchasing some capital assets could be offset immediately against profits,
• Preferential treatment for Capital Gains Tax as a qualifying business asset for Rollover relief, Holdover relief and Business Asset Disposal relief, potentially leading to significant tax savings on the disposal of a property,
• Profits treated as “net relevant earnings” for the purposes of pension contributions, allowing an individual to make tax relievable pension contributions of up to £60,000 per annum, dependent on the profits arising and other factors, and
• Exemption from the residential finance costs restriction, meaning that mortgage interest paid was deducted in full from taxable profits.

Until the recent announcement from the Chancellor on 29 July, the application of the previously announced withdrawal had been uncertain. The draft legislation has now been published and the withdrawal of the scheme will be applied as follows, with effect from the 2025/26 tax year:

• Capital allowances on the purchase of plant and machinery used in the FHL business, which allowed an immediate deduction from taxable profits for new capital items, will no longer be available. There will not be a clawback of previously claimed capital allowances (for example, if the annual investment allowance was claimed to deduct the capital expenditure in full in the year of purchase), and writing down allowances can continue to be claimed if there are existing capital allowances pools.
• Whilst capital allowances will no longer be available, replacements of existing plant and machinery with items of a similar standard will qualify for relief as a deduction from profits under “Replacement of Domestic Items relief”. Purchases of completely new items which are not replacements, will not qualify for any income tax deduction. The eligibility criteria for this relief are more stringent than under capital allowances, and therefore it is likely that some purchases which may have qualified for capital allowances in the past would no longer qualify for replacement of domestic items relief (notably fixtures, such as baths, washbasins and heating systems).
• Losses arising on an FHL will be available to offset against other property income, and vice versa. Historically losses from FHLs were not eligible to be offset against non-FHL rental income.
• Any losses which are carried forward on the FHL business on 5 April 2025 will be eligible to be offset against other UK property income. If the FHL is overseas, this will be treated as an overseas property business and losses will not be available to offset against UK property profits, and vice versa.
• Eligibility for the CGT reliefs detailed above for disposals after 6 April 2025 will be withdrawn. As a result, any gain arising on the sale of a furnished holiday let property will be taxed at the residential property rates of 18%/24% as applicable. There are some transitional provisions if property is sold between now and 6 April 2025.
• Profits from an FHL will no longer be treated as “net relevant earnings” for pension contributions,
• Mortgage interest will no longer be deducted from profits, instead a basic rate tax credit of 20% will be applied to offset against property income arising. If you are a higher or additional rate taxpayer this is likely to result in an increased tax liability.
• The possibility of Business Property Relief for IHT applying to an FHL business is not affected by the change in Income tax and Capital Gains tax treatment. The threshold for an FHL business to be treated as a business activity for IHT has always been significantly higher than the income tax threshold and requires a considerable amount of additional services to be provided by the owner to qualify for relief.

Ahead of the changes which apply from April 2025, if you are considering a change in your holiday letting activity it would be worthwhile to discuss the options available to mitigate your liabilities. It also may be worthwhile to consider accelerating capital expenditure whilst the enhanced allowances are still available if it is appropriate for your circumstances.

There are specific “anti-forestalling” rules being applied which prevent some transfers of ownership to connected parties from exploiting the current rules artificially.

If you would like further information on how these changes will affect you, please contact your usual Shaw Gibbs contact or Danny Crutchfield, who would be pleased to help.