Urgent Update: Transitional FHL Rules Landlords Can’t Ignore

The Furnished Holiday Lettings (FHL) regime will be abolished from 6 April 2025. Any individuals, businesses, and trusts who operate or sell FHL accommodation will be affected by this abolition. The objective of this policy is to promote fairness and align the tax rules of FHL with other property businesses. A current FHL business owner might be wondering about the transition to a normal accommodation business.

What Are the Proposed Changes on FHL Regime?

FHL abolition will come into effect on 6 April 2025 for Income Tax and Capital Gains Tax (CGT) and on 1 April 2025 for Corporation Tax and Corporation Tax on chargeable gains. FHL landlords get certain tax benefits in comparison to normal property investors. The FHL abolition removes tax benefits for landlords in four key areas, which are:

• The change will restrict landlords from deducting full interest on loans in their rental income to the basic tax rate. This means they will get less tax relief on their loan interest.
• Landlords will no longer be able to claim capital allowances. Instead, they can claim relief for replacing domestic items such as furniture.
• The relief on taxes of chargeable gains for trading business assets will be removed.
• The income from properties will not count as earnings when calculating pension tax relief.

What Transitional Rules Apply?

When transitioning from Furnished Holiday Lettings (FHL) to a normal accommodation business, specific transitional rules may apply. Here are some of them:

• Business will not be eligible for beneficial capital allowance. Instead, they will be eligible for replacement of domestic items relief.
• Currently, the loss generated from an FHL business can only be carried forward and utilised on that same FHL business. After the change, former FHL businesses will be incorporated into the person’s property business, and the profits and losses can be carried forward.
• Under the current rules, the FHL properties are eligible for relief such as roll-over relief, business asset disposal relief, gift relief, relief for loans and traders, and more.
• In the case of business asset disposal relief, if conditions for the relief were met before the changes to the FHL regime, the relief may continue to apply.
• The anti-forestalling rule prevents landlords from using contracts to gain tax advantages under the old rules after 6 March 2024.

These changes are expected to increase the tax revenues significantly from 2025 onwards. However., it may have no major impact on the economy. The changes will impact businesses operating under the FHL regime. However, it will make tax treatment fair to all property business owners.

Conclusion

Starting from April 2025, the Furnished Holiday Lettings (FHL) regime will be abolished for UK landlords. This will align their tax obligations with those of other property businesses, removing several tax benefits. Current FHL business owners will receive some transitional rules, but they will need to plan their financial strategies and tax liabilities carefully.