Goodbye Furnished Holiday Lets

In the last Conservative Budget, they announced the intention to abolish the Furnished Holiday Let (FHL) rules, however, no legislation was passed before the General Election. At the end of July, the new Labour Government published draft legislation on this, signalling their intention to move ahead with these plans.

With effect from 6 April 2025, where a property continues to be used for holiday lets, this will not be treated as a trade for Income Tax and Capital Gains Tax (CGT) purposes but will instead be treated as ordinary rental income. This means that for the 2025-26 tax year:

• Profits from an FHL will no longer be treated as relevant earnings for pension contribution purposes;
• Capital Allowances will not be able to be claimed on fixtures and fittings in the property, instead taxpayers will need to make claims for replacement of domestic items;
• Mortgage interest will not be able to be deducted from the FHL profits, and instead only a basic rate tax reducer will be available, disadvantaging higher and additional rate taxpayers;
• The generous CGT treatment will cease – meaning that you cannot “roll over” proceeds from an FHL into a new trading asset, and nor will you be able to benefit from the current 10% tax rate under Business Asset Disposal Relief, meaning that disposals of these properties will become subject to the current 24% tax rate.

Thankfully, there are some concessions; whereby, if you have already claimed Capital Allowances on assets in an FHL, these will not be clawed back, losses brought forward will not be lost, and in some instances, there will be a period where Business Asset Disposal Relief can continue to be claimed.

One area of tax that is not changing however, is the VAT treatment. Where a property continues to be let for short term holiday lets, this will still be subject to VAT at a rate of 20%.

The first Labour Budget is scheduled for 30 October 2024, with speculation that CGT rates could change, now may be the right time to consider the future of your FHL business. If you would like to discuss your options, please contact one of the team at Ensors.