The UK government’s decision to abolish the Furnished Holiday Lettings (FHL) tax regime is set to significantly impact property owners who have benefited from the scheme, especially in relation to pension contributions. The FHL tax regime has provided valuable tax advantages, enabling property owners to treat income from their FHLs as "business income" and thus allowing them to make pension contributions with tax relief.
With the removal of this regime, property owners will face changes that affect both their tax planning and long-term retirement savings. This article explores the implications for pension contributions after the abolition of the FHL tax regime.
Introduction to the FHL and Pension Contribution Relief
Before diving into the impact on pension contributions, it’s important to understand how the current FHL tax regime benefits pension planning for property owners.
Furnished Holiday Lettings (FHL) are properties rented out on a short-term basis, typically for holidaymakers. To qualify as FHL, properties must meet specific criteria outlined by HM Revenue & Customs (HMRC), including:
- Furnished: The property must be fully furnished and available for rent.
- Availability: The property must be available for rent for at least 210 days per year.
- Let for 105 days or more: The property must be actually let for at least 105 days each year.
The maximum tax relief available on pension contributions is the higher of:
- £3,600, or
- UK relevant earnings.
In this context, UK relevant earnings include:
- Employment income
- Trading/business income
- Furnished Holiday Lettings (FHL) income (before abolition)
This means that property owners can claim tax relief on pension contributions based on their relevant earnings, including income derived from employment, business activities, and FHLs.
Pension Contribution Relief Before Abolition
Under the current FHL tax regime, property owners who let out furnished holiday accommodation could treat the income generated from their property as business income.
This allows property owners to use their FHL profits to make pension contributions, which are subject to tax relief (as this income increases the UK relevant earnings. Additionally, this increases the basic tax band by 20% of the total(gross) pension contribution made, reducing their total tax liability while also enabling them to build retirement savings.
The Impact of the Abolition of FHL on Pension Contributions
The UK government has announced that the special FHL tax regime will be phased out by April 2025, with changes coming into effect for income tax on 6 April 2025 and for corporation tax on 1 April 2025. This abolition will bring about key changes in the way FHL income is treated, particularly in terms of pension contributions.
Transition from Business Income to Rental Income
Under the current system, FHL owners can treat the income they earn from renting out their properties as business income, which provides significant advantages for pension planning. After the abolition of the FHL regime, the income generated from FHL properties will no longer be treated as business income. Instead, the income will be classified as rental income, which typically does not offer the same tax benefits for pension contributions. This shift will limit the ability of FHL owners to use their rental income to fund pensions under the current pension contribution rules for businesses.
Restricted Pension Contribution Relief
After the abolition of the FHL regime, FHL income is now treated as regular rental income instead of business income. As a result, this rental income no longer counts towards UK relevant earnings, which limits the amount of tax relief an individual can receive on their pension contributions.
Illustration
Scenario | Before Abolition of the FHL Tax Regime | After Abolition of the FHL Tax Regime |
|---|---|---|
Other Employment Income | £25,000 | £25,000 |
FHL Income | £20,000 (treated as business income) | £20,000 (treated as rental income) |
Total Relevant Earnings | £20,000 (FHL income) + £25,000 (employment income) = £45,000 | £25,000 (only employment income counts as relevant earnings) |
Maximum pension Contribution eligible for relief | Higher of £3,600 or £45,000 (UK relevant earnings) = £45,000 | Higher of £3,600 or £25,000 (UK relevant earnings) = £25,000 |
Maximum Increase in Basic Rate Band | £45,000 (assuming individual contributes 36,000) | £25,000 (assuming individual contributes 20,000) |
Total Savings in Pension Pot | £45,000 | £25,000 |
However, there are restrictions on how much you can save in your pension pots. For the tax year 24/25 this limit is £60,000 which is subject to change.
For more information regarding this, please go to the HMRC website.
Key Considerations for Property Owners and Financial Planners
Reevaluating Retirement Planning Strategies
Property owners affected by the abolition of the FHL regime should consider revisiting their retirement planning strategies. Since they will no longer have the same tax advantages for pension contributions, they may need to explore other ways to boost their retirement savings. This could include making larger contributions from other sources of income, such as earned income.
Accelerate Pension Contributions Before the Change
One of the most effective strategies FHL owners can use is to make larger pension contributions before the new tax rules come into effect. Since the FHL tax regime will be in place until April 2025, owners have an opportunity to take full advantage of the current rules.
By making substantial pension contributions based on their FHL profits before the abolition, owners can maximise their retirement savings and benefit from tax relief in the current tax system.
Structure the Business to Maximise Pension Contributions
FHL owners may also consider restructuring their property business to maintain access to pension contribution options. For example, property owners operating as limited companies may be able to maintain the flexibility of pension contributions by drawing a salary or making employer contributions.
By paying themselves a salary and operating their FHL property under the company structure, owners can ensure that their income remains eligible for pension contributions based on employment income, which still allows for tax-deductible contributions. However, Salaries paid through a limited company should be fair and appropriate for the work done. HMRC can challenge payments made by a company that seem to be excessive compared to the work carried out.
Given the complexity of the upcoming tax changes and their potential effects on pension planning, it is recommended to seek advice from tax professionals or financial planners. Expert guidance will help ensure owners make the right decisions to safeguard your pension contributions and retirement savings.
Conclusion
The abolition of the FHL tax regime will fundamentally change the way FHL owners can contribute to their pensions. While the transition will limit the ability to use FHL income for pension contributions, property owners have several options to navigate this shift. By acting now, such as accelerating pension contributions before the changes take effect, restructuring their business model, and seeking professional advice, FHL owners can ensure they continue to save for retirement effectively and efficiently.
As the changes draw closer, it is crucial for FHL owners to plan ahead and take proactive steps to minimise the negative impact on their retirement planning.
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