Tax Changes in the Books for Furnished Holiday Lettings (FHLs)

The owners of Furnished Holiday Lettings (FHLs) now need to be mindful of an important deadline coming up very soon. Significant tax changes are on the way, and you may need advice to navigate the upcoming regulations, which will take effect from April 5, 2025.

What Tax Benefits Do FHLs Currently Enjoy?

FHL owners, such as those with Airbnb properties, currently benefit from tax advantages that traditional rental properties do not have. These benefits make Furnished Holiday Lettings (FHLs) an appealing investment, but they are expected to change significantly after April next year.

The current benefits include:

• Income Tax Deductions - Currently, property owners can deduct the entire amount of mortgage interest and related financing costs when calculating taxable profits.
• Capital Gains Tax (CGT) Reliefs - FHLs can qualify for different tax reliefs, which include relief for selling business assets, deferring tax on business asset rollovers, and delaying tax on gifted assets. These reliefs can help decrease the Capital Gains Tax (CGT) you need to pay when you sell.
• Pension Contributions - Owners of FHLs can include the profits as earnings, which allows them to make higher pension contributions and receive corresponding tax relief.

What Changes Are Coming in April 2025?

The UK government is making the following tax changes to simplify regulations, raise funds, and address housing market distortions. The changes include:

• Interest on Borrowings - Starting from April 2025, you won't be able to fully deduct mortgage interest and related financing costs when calculating taxable profits from FHLs.
• Loss of CGT Reliefs - FHLs will no longer have access to business asset disposal relief, business assets rollover relief, and gifts holdover relief.
• Domestic Items - Owners can no longer receive tax relief on the original cost of household items purchased for the property.
• Earnings for Pension Contributions - Profits from FHLs will no longer be considered as earnings for pension contribution purposes.
• Joint Ownership Taxation - By default, half of the income from renting out a property will be subject to tax for each spouse or civil partner. This may potentially move them into a higher tax bracket.

Conclusion

As the tax landscape for Furnished Holiday Lets prepares for a seismic shift, it's more important than ever for owners to seek professional advice. Understanding the new rules and taking strategic actions now can help mitigate the impact and ensure a smoother transition.

With less than two years until the changes take effect, the clock is ticking for FHL owners to make informed decisions and safeguard their investments.