Furnished Holiday Let Changes

Prior to the change in government the Chancellor of the Exchequer announced wide ranging changes to the taxation of furnished holiday let (FHL) property but nothing was included in the Finance Act. The new government has continued with this change and has now published draft legislation which will take effect in April 2025. After April 2025 holiday letting will be treated in the same way as residential or commercial property letting as part of a property letting business.

The following reliefs which are currently available for FHL will cease to apply.

1. Relief for finance costs
2. Capital allowances on assets within the let property
3. The calculation of relevant earnings for pension purposes
4. CGT reliefs
   • Rollover (replacement of business assets)
   • Business asset disposal relief (BADR) (10% tax relief)
   • Holdover (gifts of business assets)
   • Loans to traders (claims for capital losses)
5. Substantial shareholder exemption (exemption for corporation tax on chargeable gains)

The changes apply with effect from 6 April 2025 for income tax and from 1 April 2025 for corporation tax purposes. A disposal on or after these dates will not qualify for any of the above reliefs, subject to the transitional provisions.

Currently finance costs are allowed in full against the profits arising in a FHL business and relief is given against the higher rates of tax, whereas finance costs are only allowed at basic rate for other property letting businesses. From April 2025 FHL will form part of the property letting business and the restriction to finance costs at basic rate tax will apply.

A property letting business cannot claim capital allowances on plant and machinery for use in a dwelling house but this restriction does not currently apply to FHL businesses. From April 2025 FHL businesses will be treated as part of the property letting business and the restriction will apply to assets acquired on or after 6 April 2025 (1 April for CT).

Any balance in a capital allowance pool carried forward on 6 April 2025 (1 April for CT) will automatically be added to the capital allowance pool for the corresponding ongoing property letting business.

To attract tax relief, pension contributions need to be matched with ‘relevant earnings’. FHL is currently included in this calculation but will cease to be counted as relevant earnings for pension purposes from 6 April 2025.

Disposals on or after 6 April 2025 (1 April 2025 for CT) will no longer qualify for any of the relief listed above, subject to the following transitional provisions.

The unconditional contract date is generally the tax point for capital gains tax purposes. In order to prevent abuse, the reliefs will not apply where an unconditional contract has been entered into on or after 6 March 2024, and completes on or after 6 April (1 April for CT) 2025, unless either,

• The contract is entered into purely for commercial reasons, or
• The parties are unconnected.

Therefore, normal commercial sales will be unaffected but reorganising assets between connected parties to capture the relief before it is abolished is ineffective.

Where a FHL business ceases before 6 April 2025, the 10% tax rate under BADR may continue to be claimed on the disposal of the assets used in the FHL business within three years of the business ceasing.

Losses arising in the FHL business and not otherwise utilised by 6 April 2025 (1 April for corporation tax) will be carried forward and allowed against future profits in the corresponding property letting business.

If you are planning to sell a FHL property it may be beneficial to do so before 6 April 2025 in order to obtain BADR and pay CGT at 10%.

If it is not possible or desirable to sell the FHL property before 6 April 2025, there may be circumstances where it is appropriate to cease the business before the changes and sell the property in the 3 years after cessation. This should retain the entitlement to BADR and the 10% tax rate.

For continuing FHL business it may be worth incurring any plant and machinery expenditure before 6 April 2025 (1 April for CT) in order to claim capital allowances, even if these are then carried forward in the pool. Don’t forget that property businesses can claim a deduction for replacement of domestic items so that in some cases the loss of capital allowances may not be significant.

We would advise against any contrived arrangements involving disposal to connected parties such as family members, simply to obtain tax relief, but genuine disposals should be unaffected if completed before the changes take effect.

It may be advantageous to maximise pension contributions before 6 April 2025 whilst FHL profits still qualify as relevant earnings. This needs to be considered in the context of your overall tax position and one of our Financial Planners would be happy to advice further.