Furnished Holiday Lettings (FHL) have long been a popular investment choice for landlords and property owners, offering tax benefits and the potential for significant short-term rental income. However, the UK government and HMRC have announced plans to abolish FHL status on or after 6 April 2025. This upcoming change will bring about substantial shifts in both taxation and operational considerations for landlords and property investors. This article examines the implications of the FHL and outline key steps property owners should take to navigate these changes.
Implications of the Abolition of FHL Status
The removal of FHL status by HMRC, effective from 6 April 2025, will have profound implications for property owners. FHL properties will no longer benefit from tax advantages such as capital allowances and preferential treatment under Capital Gains Tax (CGT).
Key changes include:
Capital Allowances
Owners will no longer be able to claim tax relief on capital expenditures (such as furnishings and property improvements). Instead, they may only claim relief for domestic asset replacement, and this is applicable solely when replacing existing items, not for new purchases or improvements.
However, Capital allowances on previously incurred capital expenditure can still be claimed until the remaining balance is fully exhausted.
Finance Costs
The full deduction of finance costs from rental income will no longer be possible. Instead, only 20% of finance costs can be deducted from the final tax liability.
Pension Contributions
FHL profits will no longer allow owners to make pension contributions based on rental income, reducing tax efficiency as previously the pension contribution made by an individual would increase their Basic rate band of 20% by the gross amount of pension contribution made.
For more details regarding this, please check our article on, "Impact of FHL Abolition on Pension Contributions".
Capital Gains Tax (CGT)
Currently, FHL properties qualify for Business Asset Disposal Relief (BADR), which offers a reduced CGT rate of 10% on property sales. After 6 April 2025, FHL properties will no longer be eligible for BADR, and sales will be subject to the standard residential CGT rates of 18% or 24%.
Losses
Under the new regime, losses incurred on FHL properties will be offset against income from all other properties, as opposed to only being deductible from the same FHL business income.
What should you Do?
The decision on how to respond to the abolition of FHL status will depend on individual circumstances, such as the profitability of your FHL property, future plans, and financial goals. Before 6 April 2025, property owners should evaluate the overall profitability of their FHL business and consider the following:
- Is the property currently profitable or loss-making?
- Will you need to invest in significant refurbishments or capital improvements?
- What are your plans for future growth or potential sales?
- Do you make pension contributions based on FHL income?
The answer to the question “what should you do?” is purely subjective and depends upon person to person, his/Her’s situations and future plans related to the respective property. Depending upon your wish the possible courses of action include:
- Sell your property
- Continue to rent it
- Retire and live within that property
Your choices might differ based on your situation. Each option has different implications, which are explored below.
Sell the Property?
If your future plan involves selling the property, then you can either choose to sell before 6 April 2025 or after the abolition date. The tax to be paid differs in case of these two decisions. Understanding the tax implications of both the scenarios is important for the FHL owners to reduce their overall tax to be payable.
What if you Sell Before 6 April 2025?
One of the most immediate actions for FHL owners may be to sell their properties before the abolishment of FHL status. Under the current regime, property owners can benefit from Business Asset Disposal Relief (BADR), which allows a reduced CGT rate of 10% on the sale of FHL properties (up to a lifetime limit of £1 million). However, from 6 April 2025, FHL properties will no longer qualify for BADR, and any gains made from their sale will be subject to the standard CGT rates for residential property (18% or 28% depending on income level).
Example
Factor | Amount | Description |
|---|---|---|
Market Value (Sale Price) | £800,000 | Price at which the property is sold. |
Original Cost (Including Stamp Duty and Solicitors) | £400,000 | Initial cost of the property, including transaction fees. |
Capital Improvements | £100,000 | Improvements made to the property that were not claimed for income tax purposes. |
Selling Costs | £20,000 | Costs associated with selling the property. |
Capital Gain | £280,000 | The gain after adjusting for improvements and selling costs. |
Tax-Free Annual Exemption | £3,000 | The tax-free amount you can deduct from your capital gain each year. |
CGT Before 6 April 2025 | £27,700 | 10% tax (Business Asset Disposal Relief (BADR)) on taxable capital gain (£277,000). |
What if you Sell on or after 6 April 2025?
If you sell the property after 6 April 2025, then you will not be entitled to any benefits related to BADR relief. So, your capital gains will be taxed at 18% or 24% depending on your income level.
Capital Gains = £280,000 (same as above)
Taxable capital gains = £277,000 (after deducting Annual exemption of £3,000)
CGT after 6 April 2025 = £66,480 (24% on taxable capital gain of £277,000)
Increase in CGT
As, seen additional tax of £38,780 is owed to HMRC by the individual if he/she sells the property after 6 April 2025 in the same capital gain. This is because where the tax due jumps from 10% to 24% as BADR relief is not available.
Note
(Business Asset Disposal Relief (BADR)) can still be available if the property previously qualified for BADR and the FHL was ceased before 6 April 2025. In this case, the relief will continue to apply subject to that disposal of the property occurs within normal 3 years period following cessation.
Suggestion?
If you are thinking of selling your property then this might be the right time as after the abolition, you will be liable to more capital gains tax. However, before taking any decision you will also have to considers factors such as market value of the property and its volatility. If the market value is stable, isn’t subject to many fluctuations and isn’t predicted to increase in the near future, then selling now might be the good decision for you.
However, the right decision changes as per the situation, so it is better to consult with a professional before making any decisions.
Continue to Rent it
If your future plan is to continue renting out the property and not selling it, then the situation for you might be completely different.
In this case what you should do depends upon your status i.e. whether you are planning to incur any capital expenses on the property or not, whether or not you are eligible for contributing more on pension contribution to get a relief, whether you are a higher or basic rate taxpayer, etc.
What should you do if you want to continue to rent it?
The actions that you should consider if you have recently purchased FHL and want to continue to let it even after the abolishment might be:
Before Abolition (6 April 2025)
Consider increasing your pension contributions from your FHL income (if you are eligible) to increase your basic tax rate band by gross pension contribution made. If you contribute£80 towards pension contribution, then your basic rate band will be increased by £100 as you receive relief at basic rate band for pension contribution made. This will allow your more income to be taxed at 20% rather than higher band of 40% However, this will reduce the amount of cash you have available to cover your day-to-day expenses.
Consider transferring part of your property to your spouse or adult children to spread the income across your family. However, capital gains tax (CGT) will apply on non-spouse transfers, unless you claim 'holdover relief' to delay tax until the property is sold. This transfer will allocate the profits from the property allowing you to take advantage of other person’s personal allowances and other reliefs, potentially if you are a higher rate taxpayer and you must pay higher tax on the same amount of income if not allocated.
If you are planning to spend large sum of money in capital expenditure (maybe because you have recently purchased FHL or due to normal course of business) such as furniture, improvements, white goods, etc. in the near future, then consider making those investments before 6 April 2025 to take benefit of the capital allowances in the future. After 6 April 2025, you will only be able to claim relief for any replacement made not any improvements.
After Abolition (after 6 April 2025)
Increase the rent you charge to compensate for higher taxes, as there is no longer a requirement to rent out the property for a set number of days.
Shop around for a better buy-to-let mortgage to lower interest costs as the relief for finance cost will be restricted to 20% after abolition, though this is usually well managed.
If possible, you might want to consider shifting some of your income to sources that count towards pension contributions. For example, you could move some dividend income to salary income, which could increase the amount you’re allowed to contribute to your pension. After the FHL changes, relevant earnings for pension contributions include employment income and trading income. However, it’s important to analyse this carefully, as dividends are taxed at a lower rate than salary. A thorough review is needed to determine which option will benefit you the most.
Consider transferring part of your property to your spouse or adult children to spread the income across your family
Description | Current Tax Scenario (Before 6 April 2025) | Tax Scenario (After 6 April 2025) |
|---|---|---|
Salary | £37,000 | £37,000 |
Rental Profit before Interest | £15,000 | £15,000 |
Improvements | £3,000 | £3,000 |
Interest Paid | £5,000 | £5,000 |
Taxable Income | £37,000 (Salary) + £15,000 (Rental Profit) – 3000(Capital Allowance) - £5,000 (Interest)- 12,570(P.A) = £31,430 | £37,000 (Salary) + £15,000 (Rental Profit) – 12,570(P.A) = £39,430 |
Tax Bill | 20% of (£31,430) = £6,286 |
|
Increase in Tax | Cell | The tax bill increases by £946 annually, even though income remains unchanged. |
Losses
After the abolition of FHL, any losses from that property can be used to offset income from other rental properties. This also applies to any losses carried over from previous years. This also indicates it could be beneficial to carry out major refurbishments before 6 April 2025, as the resulting losses can be carried forward and used to reduce income from other rental properties.
Continue as a non-FHL short term let or as a long term Let?
Deciding whether to continue as a non-FHL short-term letting or as a long-term letting depends upon the rental income amount, it’s stability and your preference. Short-term letting provides access to higher ongoing rental income but the income may not be stable whereas long-term letting may lead to lower income in comparison to non-FHL short-term letting but it provides stable and more predictable source of income.
Retire and live within that property
If your future plan is not to sell the FHL property but to treat it as a retirement home or main residence and live there, then you should be conscious about your income tax implications.
Tax Implications
In this case, you will not be entitled to any property income as you have left renting and started living off in the property. You will be entitled to 24% capital gains tax (which might change in the future) when you sell this property years later after living in it. However, you might be entitled to Permanent Residence Relief (PRR) which might reduce somewhat of your capital gains tax.
For more information regarding PRR, you can refer to, "Private Residence Relief (PRR): Applicability, Periods, and Rules".
What should you do?
If you plan on using the FHL property as a main residence, then the beneficial option for you is to take advantage of FHL until its abolition and consider increasing your pension contributions from your FHL income (if you are eligible) to increase your basic tax rate band by gross pension contribution made. However, this will reduce the amount of cash you have available to cover your day-to-day expenses.
Conclusion
The upcoming abolition of the Furnished Holiday Lettings (FHL) tax regime, set to take effect from 6 April 2025, will undoubtedly bring significant changes for property owners and landlords. The loss of tax advantages such as Business Asset Disposal Relief (BADR), capital allowances, and the ability to claim full finance cost deductions could increase the tax liabilities for many FHL owners. However, with strategic planning, these changes can be mitigated, and owners can still optimise their tax positions.
For FHL owners, it is essential to assess the long-term profitability of their properties and determine the best course of action based on individual circumstances. Whether it’s selling the property before the abolition date to lock in the lower CGT rate, continuing to rent it with adjustments to tax planning, or transitioning the property into personal use as a retirement home, each choice requires careful evaluation.
Before 6 April 2025, property owners should consider increasing pension contributions, restructuring property ownership, and accelerating capital expenditures to maximise available tax benefits. After the change, it will be critical to adapt to the new tax environment by reviewing rental pricing, exploring more favourable financing options, and evaluating the potential benefits of transitioning properties into long-term lets or other types of short-term rentals.
Ultimately, FHL owners should seek professional advice to navigate the shifting tax landscape, ensuring that they make informed decisions that align with their financial goals and future plans. By taking proactive steps before the abolition date, property owners can reduce the adverse impacts of these changes and continue to maximise their investments in the post-FHL world.
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