Furnished Holiday Let Changes

With draft legislation now released, we thought it would be good to provide an update to our earlier article in the Spring newsletter, to outline the proposed transitional changes to the furnished holiday let (FHL) regime and outline some planning opportunities ahead of and after 6 April 2025.

To recap, qualifying FHLs have attracted a number of tax reliefs which do not apply to general property letting. The following reliefs are affected by these measures:

• Relief for finance costs
• Capital allowances
• The calculation of relevant earnings for pension purposes
• CGT reliefs
• Rollover relief (replacement of business assets)
• Business asset disposal relief (BADR) (10% tax relief)
• Holdover relief (gifts of business assets)

The new rules remove the ability to claim capital allowances on expenditure such as electrical works, new furniture, white goods and equipment. The existing replacement rules for rental businesses will mean this change will not be significant for ongoing FHL properties as relief will be available where items are being replaced. The impact will be felt for new FHL businesses where there will no longer be relief for initial setup costs.

The good news, however, is that any balance in a capital allowance pool carried forward from April 2025 will automatically be transferred to the ongoing property letting business.

Planning points – consider investing in capital expenditure pre 5 April to take advantage of these more beneficial rates being available.

FHL income will cease to be counted as relevant earnings for pension purposes from 6 April 2025.

Planning point – maximising pension contributions before 6 April 2025 whilst FHL profits still qualify as relevant earnings could therefore be beneficial.

Please do speak with one of our financial advisors, should this be relevant to you.

As mentioned, there are a few CGT benefits available to FHLs being considered a trade, rather than investment property for CGT purposes.

BADR is available where a FHL business ceases before April 2025 and may be claimed on the disposal of the assets used in the FHL business for up to three years after cessation.

Planning point – you could therefore cease the FHL business before 5 April 2025, let the property on a long term let and still have the ability to claim BADR up until April 2028.

A risk to this approach is the impending Budget and suggestions that BADR itself may be at changed or abolished.

FHLs have also benefitted from gift relief whereby an FHL property can be gifted with no immediate charge to CGT - an option which will not be available following 6 April 2025 unless gifting into a Trust. Thought should be given to making use of this relief now with potential IHT benefits too.

The final option, rollover relief, can also defer the gain made on a FHL by investing the proceeds into other business assets, such as farmland or capital improvements to existing assets within 3 years. This way you can delay the CGT until the sale of the replacement asset. There is also the option to rollover into plant and machinery, albeit on a more temporary basis.

It should be considered that the property market might not be conducive to a quick sale of a FHL property to allow for rollover relief and you should avoid any contrived arrangements involving disposals to connected parties such as family members as anti-forestalling measures have been introduced.

Planning points summary – consider ceasing the business, gifting onto a future generation or selling and rolling over into other qualifying assets ahead of 6 April 2025.

An unexpected allowance in the rule change is that FHL losses not utilised by April 2025 will be able to be offset against other rental profits from the same business rather than only against future FHL profits.

Unfortunately, if you have rental profits within a farming partnership, and a FHL with losses outside of the partnership, you will not be able to offset these losses as they are considered different rental businesses.

FHL income also benefits from the flexible sharing of profits / losses between owners. From 6 April 2025 the profit share will need to match the ownership, commonly 50:50 between husband and wife. If it is beneficial to split the income differently, then a declaration of trust should be considered.