The end of Furnished Holiday Letting (FHL) tax incentives: What you need to know

From April 2025, the UK Government will abolish the Furnished Holiday Letting (FHL) tax regime, bringing significant changes to the taxation of short-term rental properties. These reforms will affect income tax, capital gains tax (CGT), and the overall financial viability of FHL businesses. Property owners must understand the implications of these changes and explore their options to manage their investments effectively.

Here, we explain what it could mean for you and offer some potential strategies.

What are the changes? 

Restrictions on mortgage interest relief
Currently, mortgage interest for FHLs can be deducted at an individual’s marginal tax rate. From April 2025, relief will be limited to 20%, reducing benefits for higher and additional rate taxpayers.

Removal of relevant earnings classification
FHL income will no longer count as relevant earnings for pension contributions. This will limit pension tax relief for property owners who rely on FHL income.

Loss of capital allowances
FHL businesses can currently claim capital allowances for new plant and machinery. Post-2025, this will be replaced with domestic items relief, which only allows deductions for replacement furniture and fittings.

Changes to Capital Gains Tax (CGT) relief

• Business Asset Disposal Relief (BADR): The current 10% CGT rate on qualifying FHL disposals will end.  BADR for FHLs will only apply if the business ceases before 6 April 2025, and the property is sold within three years.
• Rollover relief: This will no longer apply to gains reinvested in business assets.
• Holdover relief: Gifting FHL properties to family members without incurring immediate CGT will no longer be possible.

Anti-forestalling rules are being introduced that will prevent claiming these reliefs on transactions not completed by the deadline.

Simplified loss offset rules
Losses from FHL properties can be offset against other property income, aligning with the standard property rental regime.

Impact on joint ownership
Profit-sharing flexibility between spouses will end, and a Form 17 will be required to formalise unequal ownership splits.

Impact on property owners
These changes will increase tax liabilities for FHL owners and remove incentives that have made short-term letting an attractive investment, due to reduced mortgage interest relief and loss of capital allowances. Additionally, pension planning will become more constrained as FHL income no longer counts toward relevant earnings.

Some owners may find the additional tax burden unsustainable, prompting them to reassess the viability of their businesses.

What actions can you take?
With less than four months until the changes take effect, planning is crucial.  Here are some strategies to consider:

Sell before 5 April 2025
If you are ready to exit the market, you should act quickly to benefit from the current BADR rate of 10% or the 24% residential CGT rate, which is lower than the previous rate of 28%. Ensure all transactions are completed before the deadline to avoid anti-forestalling provisions.

Cease operations and sell within three years
If you decide that continuing as a landlord isn’t viable, ceasing FHL operations before April 2025 preserves access to BADR for properties sold within three years, albeit at increasing rates (14% from April 2025, 18% from April 2026).

Transfer to a company
Incorporating an FHL business could provide long-term tax benefits, such as full deductibility of mortgage interest and lower corporation tax rates (19%-25%). However, factor in costs like stamp duty, capital gains tax, and ongoing compliance.

Move to standard letting
Continuing as a standard rental business is an option but will result in:

• 20% mortgage interest relief cap.
• Loss of capital allowances for new items (domestic items relief applies instead).
• Equal profit allocation between spouses or civil partners unless a Form 17 is filed.

Make capital investments before April 2025
Improvements made before the deadline will allow ongoing claims for writing-down allowances, helping to reduce taxable profits in the short term.

Consider gifting to family members
Transferring FHL properties to the next generation before April 2025 may reduce exposure to inheritance tax. However, this is subject to CGT implications and anti-forestalling measures. Please seek advice to ensure compliance.

Next steps for property owners
The abolition of the FHL regime marks a pivotal moment for holiday let owners.  While the new rules impose higher tax costs, strategic planning can soften the impact. Owners should:

• Assess the profitability of their FHL under the new regime.
• Seek professional advice to explore selling, gifting, or restructuring options.
• Ensure compliance with new reporting and documentation requirements, particularly around joint ownership.

With April 2025 fast approaching, now is the time to act. For tailored advice on how these changes affect you, contact JW Hinks today and our team of property tax specialists and financial advisors can help you to explore your best course of action.