Tax breaks for furnished holiday lets axed from next year

Furnished holiday lets (FHL) will now be treated in the same way as other rentals when it comes to tax, with changes coming in from April next year.

The plan to abolish the FHL tax regime was announced in the Conservative budget this spring, with the new Government announcing detailed proposals to bring the plans forward as a priority.

After repeal, former furnished holiday let properties will form part of the person’s UK or overseas property business and be subject to the same rules as non-furnished holiday let property businesses.

Making the announcement the Government said the move ‘promotes fairness and aligns the tax rules for furnished holiday lettings with those for other property businesses’.

What is a FHL?

To qualify as a furnished holiday let, properties:

• must be available for short-term letting to the public for 210 days and actually let for 105 days or more in each tax year
• should not be used as a long-term let of over 31 days for significant periods.

The distinction for a furnished holiday let was introduced in 1984, introducing more beneficial tax treatment for short-term lettings compared to other property businesses.

What changes are being brought in?

The new rules will remove the tax advantages that current furnished holiday let landlords have received over other property businesses in four key areas by:

• applying the finance cost restriction rules so that loan interest will be restricted to basic rate for Income Tax
• removing capital allowances rules for new expenditure and allowing replacement of domestic items relief
• withdrawing access to reliefs from taxes on chargeable gains for trading business assets
• no longer including this income within relevant UK earnings when calculating maximum pension relief.

When will the changes come in?

Under the Government plans the regime will be abolished:

• on or after 6 April 2025 for Income Tax and for Capital Gains Tax
• from 1 April 2025 for Corporation Tax and for Corporation Tax on chargeable gains

The Government has laid out some more detailed proposals for the transitional period, which can be found here.

The NRLA does not specifically represent owners of FHLs, but some of our members operate both standard lets via ASTs and holiday lets.

The association will continue to make the case for tax incentives that support landlords in providing essential homes to rent. You can find out more about our ongoing campaign here.