Is the Furnished Holiday Lets Tax Regime to be Reformed?

Draft legislation has recently been published and some important changes are proposed, representing a significant shift in the taxation landscape for affected landlords. The regime will be effective for individuals paying Income Tax on profits from 6 April 2025 and from 1 April 2025 for those paying Corporation Tax.

Here are the headline implications for landlords:

1.Capital Allowances:

• Current Regime: Capital allowances available on qualifying expenditure.
• Post-2025: No capital allowances on new expenditure. Transitional rules in the legislation show that there will be no balancing allowances on expenditure previously claimed via capital allowances, but historical items still eligible for relief can be claimed over time.

2. Replacement of Domestic Items:

• Current Regime: Initial acquisition of items could qualify for capital allowances as detailed above.
• Post-2025: Relief can only be claimed for replacement domestic items, e.g. white goods, not the initial acquisition.

3. Loan Interest Restriction:

• Current Regime: Full mortgage interest deduction as allowable expenditure.
• Post-2025: Deduction of loan interest payments will be restricted to basic rate tax (similar to other rental properties) under the finance cost restriction rules for individuals.

4. Net Relevant Earnings for Pensions:

• Current Regime: Profits treated as net relevant earnings for pension contribution purposes.
• Post-2025: No longer treated as net relevant earnings.

5. Losses:

• Current Regime: Losses can only be offset against future profits from the same FHL business (UK and overseas).
• Post-2025: Losses can be amalgamated with other property income.

6. Capital Gains Tax (CGT):

• Current Regime: FHL properties qualify for various Capital Gains Tax (CGT) reliefs for individuals and corporates (e.g. Business Asset Disposal Relief, Rollover Relief, and Holdover Relief). A residential property CGT return will be due within 60 days of completion, for individuals selling or gifting, where a tax liability arises.
• Post-2025: FHL properties will be taxed like other properties at CGT rates of 18%/24% for individuals and the relevant Corporation Tax rate for companies. The need to file a CGT return continues for individuals.

7. Anti-Forestalling Rule:

•  This will prevent the obtaining of a tax advantage through the use of unconditional contracts to obtain capital gains relief under the current FHL rules — this rule applies from 6 March 2024.

Actions to consider now:

1. Given that the initial cost of domestic items will not receive immediate tax relief from April 2025, consider accelerating any plans for renovations/ improvements to ahead of this date.
2. Review current financing arrangements and consider the impact of restricted mortgage interest relief, given that additional tax liabilities for individuals may arise.
3. If attainable, plan any potential sales of FHL properties to complete before the changes take effect, to benefit from the current reliefs to manage CGT liabilities effectively.
4. Review of current property portfolio (if applicable), given that the losses will be amalgamated from April 2025.

There are some noteworthy changes being planned, therefore for those who may be affected, please contact Duncan Cleary, Senior Tax Manager, for advice or support with any of the above.