HMRC has published draft legislation explaining how the abolition of the special tax rules for furnished holiday lettings (FHLs) will work.
From 6 April 2025 for sole traders and partnerships, or 1 April 2025 for companies, properties currently classed as FHLs will no longer benefit from tax reliefs not available to ordinary property letting businesses. Instead, income and gains from an FHL will be treated in line with all other property income and gains, meaning that:
- finance cost relief will be restricted to basic rate for income tax;
- profits from FHLs will not be included in relevant UK earnings when calculating maximum pension relief;
- special reliefs from Capital Gains Tax (CGT) including roll-over relief, business asset disposal relief (BADR) and gift relief will no longer be available; and
- the capital allowances rules for new furniture and equipment expenditure will be removed and relief will be available instead for replacement of domestic items in certain circumstances.
Where an existing FHL business has an ongoing capital allowances pool of expenditure it will be able to continue to claim writing-down allowances on that pool.
Under the existing regime, losses from FHLs can only be offset against future FHL profits. Transitional rules will allow these losses to be carried forward and offset against future profits from the taxpayer’s overall UK or overseas property business.
Transitional measures will also apply to CGT reliefs. However, to prevent owners of existing FHLs from using unconditional contracts to side-step the changes, anti-forestalling measures will apply from 6 March 2024.
Joint owners of property will no longer be able to choose how to split the profits from an FHL business. Instead, they will be required to report the profits on a 50:50 basis in line with the rules applicable to property rental businesses. It may be possible to alter this split in certain circumstances, for example if you can prove that your beneficial ownership is unequal.
If you own an FHL, contact us to discuss what these changes will mean for you.