Financial focus on what now for FHLs?

The landscape for furnished holiday lettings (FHL) are about to change dramatically.  Broadly, the tax benefits for running an FHL have been severely curtailed with effect from the 2024 Spring Budget and removed entirely from 5 April 2025 for individuals (31 March 2025 for corporate FHLs).

So what action can the owners take before FHLs start to be taxed like regular rental income?

• Maximise Capital Allowances: FHLs can claim capital allowances on furniture, fixtures and equipment whereas rentals are generally restricted to repairs and renewals.  Making new purchases before 6 April 2025 will maximise any Capital Allowances still available. New claims after 5 April 2025 will not be allowed but continuing writing down of unexhausted expenditure pools can continue;

• Consider joint ownership:  If you currently let your FHL unequally, HMRC will treat rental income jointly owned by spouses 50:50 no matter the underlying ownership.  Consider transferring ownership to the spouse with the lower tax exposure (potential additional legal costs to do so) or electing for precise split of income to the underlying capital ownership by using form 17 for tenants in common (additional evidence would be required such as a deed). Note elections on form 17 cannot be backdated and have effect from date of receipt by HMRC.  Unmarried owners can continue to allocate rental income as they wish irrespective of underlying capital;

• Selling the FHL: Qualifying FHL owners have previously benefited from Business Asset Disposal Relief (BADR) on a sale, thereby reducing capital gains tax. BADR is being withdrawn, however ceasing the FHL business before 6 April 2025 and selling the property within 3 years of the cessation may still attract BADR. Separately, anti-forestalling rules prevent BADR when contracts are exchanged before 6 April 2025 but completion is after this date, unless it is a genuine arm’s length commercial disposal which is not to a connected person or undertaken to obtain a tax advantage.

• Use Rent-a-Room relief: If you let a room in your main residence, you can claim up to £7,500 exemption (or £3,750 per spouse) but with no expenses deductible. This may be a useful alternative for small scope letting.

The cessation of the FHL regime is the end of an era introduced in 1984.  By being proactive, the change may not be as severe as it might be with holiday letting activities still potentially being more profitable than long term rental.