Abolition of FHL tax benefits from 6 April 2025

The Chancellor has announced that the favourable tax treatment currently available to furnished holiday lettings (FHLs) will be abolished effective from 6 April 2025.

The Chancellor has announced that the favourable tax treatment currently available to furnished holiday lettings (FHLs) will be abolished effective from 6 April 2025.

Who will be affected?
This change will affect owners of furnished holiday homes that are let out on a commercial basis and meet the criteria to qualify as FHLs for tax purposes. Affected individuals may want to take proactive steps before 6 April 2025.

Current rules for FHLs

FHLs currently benefit from a range of advantageous tax rules compared to other property businesses, including:

• The full amount of finance costs, such as mortgage interest, can be deducted from FHL income for income tax purposes.
• On the disposal of FHLs, owners may qualify for Business Asset Disposal Relief (BADR), enabling the first £1 million of lifetime gains to be taxed at a reduced rate of 10%. Alternatively, gains can be deferred by rolling them over into the purchase of qualifying new business assets.
• Tax relief for pension contributions is capped at the higher of £3,600 or 100% of ‘relevant earnings’. As profits from FHLs qualify as relevant UK earnings, they expand the allowable limit for pension relief.
• FHL businesses are eligible to claim capital allowances on qualifying expenditures.

New rules from 6 April 2025

From 6 April 2025, the favourable tax treatment and separate reporting requirements for FHLs will be abolished. Income and gains from FHLs will:

• Form part of the owner’s UK or overseas property business.
• Be treated in line with all other property income and gains.

Key Changes:

• Mortgage interest will no longer be fully deductible from FHL income. Instead, relief will be provided as a 20% tax credit based on the lower of:
• Finance costs.
• Property business profits.
• Adjusted total income – income after losses and reliefs, excluding savings and dividend income, that exceeds the personal allowance.
• Disposals of FHLs will be subject to the standard residential property CGT rates, and rollover relief on gains will no longer be available.
• Owners can only claim a deduction for the cost of replacing domestic items against rental income. Existing capital allowances pools will be carried forward, allowing continued claims for writing-down allowances until the pool is exhausted or a small pool claim is made.
• FHL profits will no longer qualify as relevant UK earnings for the purpose of claiming tax relief on pension contributions.

 If an FHL business ceases on or after 6 April 2025, BADR will no longer be available. However, if the business ceases before 6 April 2025, BADR can still apply, provided the property is disposed of within three years of cessation and the FHL has been operated as a trading business for at least two years prior to cessation. Additionally, the CGT rate on disposals qualifying for BADR will increase from 10% to 14% from 6 April 2025, and to 18% from 6 April 2026 onwards.

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