Impact of FHL Tax Regime Abolition & Transition to Company Structure

Furnished Holiday Accommodation (FHL) has long been a preferred tax-efficient investment for landlords offering short-term rentals in the UK. The FHL regime provided several financial incentives, such as Business Asset Disposal Relief, Capital Allowances, and mortgage interest relief, making it an attractive option compared to traditional property lettings. However, the UK government has announced the abolition of FHL tax regime, significantly affecting landlords who benefited from these tax advantages.

This article examines the reasons behind the abolition of FHL, the tax implications for landlords, and the potential benefits of transitioning to company ownership as an alternative tax strategy.

Abolition of FHL

The UK government has officially announced that the Furnished Holiday Accommodation (FHL) tax regime will be abolished. This change will come into effect from 6 April 2025 (1 April 2025 for company), meaning landlords must prepare significant tax changes when the new rules take place. The abolishment aims to align the tax treatment of short-term holiday lets with traditional property rentals, eliminating preferential tax benefits available to FHL owners.

With the abolition of the FHL status, landlords who previously benefited from tax reliefs specific to FHLs will now be taxed under the standard rental property rules. The following table outlines the major tax changes:

The removal of FHL tax benefits is expected to increase tax liabilities for landlords, making tax-efficient structuring more important than ever.

Transition from Individual to Company Ownership: Tax Implications

Many Landlords are now considering transferring their rental properties into a limited company structure to mitigate tax burdens. However, this transition has several tax implications:

Capital Gains Tax (CGT) applies when FHL is transferred from personal ownership to a company, as such a transfer is considered a disposal for CGT purposes. The tax liability arises if the property's value has appreciated since its acquisition. However, Incorporation Relief under TCGA 1992, section 162, may be available if the landlord operates the property as a business rather than a passive investment, potentially deferring the CGT liability. 

However, if the landlord can demonstrate that they actively manage the property as a business, they may qualify for Incorporation Relief. This would defer the CGT liability by rolling the gain into the value of the shares issued by the company, meaning no immediate CGT payment is required. 

There are many other points to consider for establishing the trading status and we suggest business owners to seek professional advice with regards to this.

Stamp Duty Land Tax (SDLT) is generally triggered when transferring FHL to a company and for companies, an additional 5% surcharge applies to all the property acquisitions. This means that if an individual transfers a personally owned rental property to a company, SDLT will be payable on the market value of the property, plus the surcharge.

However, since the transfer is to a company, an additional 5% surcharge applies, calculated on the full £400,000:

5% of £400,000 = £20,000

This means total SDLT liability on the transfer would be £7,500+£20,000 = £27,500

The 17% flat SDLT rate does not apply if the property is purchased for genuine business purposes, such as property rental, development, trading, social housing, or employee accommodation. Companies must meet HMRC’s exemption criteria to qualify.

Companies and individuals are subject to different tax treatments on rental income. When rental income is received through a company, it is taxed at corporation tax rates, which are currently 25% for profits exceeding £250,000, 25% with marginal relief on the profits between £50,000 and £250,000 and 19% for smaller profits (less than £50,000). In contrast, individuals who earn rental income are subject to income tax rates (20%, 40%, 45%) with an additional impact from the loss of the personal allowance once income exceeds £125,140.

Benefits of Transitioning to a Limited Company Structure

With the recent abolishment of Furnished Holiday Lettings (FHL) tax benefits, many landlords are reconsidering how they structure their property businesses. Previously, FHL landlords enjoyed significant tax advantages, such as full mortgage interest relief, capital gains tax relief, and the ability to claim capital allowances on furniture and fixtures. However, with these benefits now being removed, individual landlords could face higher tax liabilities, making it less profitable to operate rental properties under personal ownership.

As a result, an increasing number of landlords are exploring the benefits of incorporating their property businesses into a limited company structure. By transferring their rental properties into a company, they may be able to mitigate some of the tax burdens and improve long-term financial efficiency. Below are the key advantages of making this transition:

One of the primary motivations for incorporation is the difference in tax rates. Individual landlords are subject to income tax rates of up to 45%, whereas companies pay corporation tax at 25% (or 19% for lower profits). Additionally, company owners can distribute profits as dividends, which may be more tax-efficient compared to rental income taxed at higher personal tax rates. This can result in a significant tax saving, especially for higher-rate taxpayers who would otherwise pay 40% or 45% on rental income.

A major disadvantage of owning property as an individual after the FHL abolishment is the loss of full mortgage interest relief. Under current rules, individual landlords can no longer deduct mortgage interest directly from their rental income; instead, they receive a basic-rate tax relief of 20% on interest payments.

In contrast, companies can still deduct 100% of mortgage interest from their profits before tax, which reduces taxable income and improves cash flow. This makes incorporation a more tax-efficient option for landlords with significant borrowing costs, as they can fully offset mortgage interest payments against rental income, lowering their overall tax liability.

Operating through a limited company structure creates a legal separation between personal and business assets, meaning landlords are not personally liable for company debts or legal claims. This significantly reduces financial risk, as personal assets such as homes and savings remain protected in the event of business difficulties. In an unpredictable property market, this added security provides peace of mind, allowing landlords to manage their portfolio with confidence while mitigating potential financial exposure.

Operating rental properties through a limited company can enhance a landlord’s professional image and credibility. Lenders, banks, and financial institutions often perceive limited companies as more stable and reliable compared to individual landlords, making it easier to secure financing. Many lenders offer better mortgage deals and lower interest rates to companies, as they are seen as structured business entities rather than private individuals.

Additionally, limited companies may have access to lower corporate finance rates, which can significantly reduce borrowing costs over time. This improved financial flexibility allows landlords to expand their property portfolio more efficiently, reinvest profits, and take advantage of better funding opportunities that might not be available to individuals. As a result, incorporation can provide landlords with long-term financial stability and greater growth potential in the property market.

Additional Considerations for FHL

With the abolition of the Furnished Holiday Lettings (FHL) regime, many landlords are now looking to transfer their FHL properties into a company structure. This shift is primarily driven by the need to adapt to the changing tax landscape.

However, incorporating these properties comes with several tax and legal implications that must be carefully assessed to ensure compliance and cost-effectiveness.

When held personally, FHL did not require compliance with Annual Tax on Enveloped Dwellings (ATED). However, with the planned incorporation of these previously individually owned FHL properties, ATED becomes an important consideration. Once transferred into a company, any residential property valued above £500,000 will trigger ATED obligations, which could lead to significant additional tax liabilities.

It is essential for landlords to carefully assess the impact of ATED, including verifying eligibility for any available reliefs tailored for rental businesses, to ensure that the overall tax strategy remains efficient and compliant.

Transitioning from individual ownership to a company structure introduces additional legal and compliance requirements. Operating a rental business through a company necessitates Companies House filings, submission of corporation tax returns, and preparation of annual accounts, which were not required under personal ownership.

Furthermore, landlords must be mindful of the increased accountancy and administrative costs associated with corporate compliance, making it essential to weigh the regulatory obligations before proceeding with incorporation.

Conclusion

The abolition of the FHL tax regime marks a major change in the UK property taxation landscape. Landlords must reassess their financial strategies to navigate the increased tax burden and potential loss of key reliefs. Many are exploring incorporation to take advantage of corporate tax benefits, but careful planning is essential to minimise CGT, SDLT, and administrative costs.

Transitioning to a company structure can offer tax efficiencies, but it requires a thorough evaluation of compliance obligations, financing options, and long-term investment goals. Seeking professional tax advice will be crucial in ensuring a smooth transition and maximising financial benefits in response to these legislative changes.