This announcement was a surprise. From 6 April 2025 the tax regime around furnished holiday lets (FHL) will be abolished, and they will be treated the same as other let properties for tax purposes. Unlike traditional buy to lets, FHLs are a trading business, and as such can benefit from all kinds of ‘special tax treatments.’
Income Tax
FHL qualify as UK relevant earnings with full tax relief for pension contributions. Profits from a FHL are treated the same way as employment and self employment income.
Capital allowances, which reduce the taxable profits of a FHL, are available against the cost of providing furniture and equipment such as cookers, washing machines and beds.
April 2017 introduced rules restricting the amount of income tax relief available for the finance costs of a let property. These restrictions do not apply to FHL, and so full relief can be obtained for finance costs.
Losses can be offset against future FHL profits. However, in certain circumstances a loss from FHL can be offset against other types of income.
Capital Gains Tax
Selling a traditional buy to let incurs 18% or 28% capital gains tax, while furnished holiday lets can benefit from ‘Business Asset Disposal Relief’. This reduces capital gains tax rates down to 10%.
Rollover relief – the gain on another qualifying asset may be rolled into the purchase of a FHL, or the gain on the disposal of a FHL may be rolled into the purchase of another qualifying asset.
Business asset gift relief – the gain on the gift of a FHL can be held over for CGT purposes. This means the recipient if the gift pays CGT only when the FHL is sold in the future.
Inheritance Tax
HMRC has viewed FHLs as predominantly investment businesses rather than trading businesses and has denied claims for business property relief. However, following a success in the courts, FHL accommodation can represent a business qualifying for business property relief, but the nature and quality of the services provided is what makes the difference to a successful business property relief claim. This outcome suggests that HMRC would deny business property relief unless the services provided are close to that of a hotel.
Planning opportunities
About 127,000 individuals in the UK declared ownership of FHL in their 2019/2020 personal tax returns, the latest tax year for which data is available. These individuals will be disappointed to lose all the tax reliefs identified above. It may be worthwhile considering whether the FHL should be sold before April 2025 to attract the favourable rate of 10% capital gains tax.
Whether the FHL is transferred to a limited company, this will be treated as a sale by the individual who can obtain the 10% capital gains tax rate.
A FHL had very strict rules on the number of days it can be let to qualify as a FHL. From 6 April 2025, there is complete flexibility for the owner of a property to maximise their profits through letting the property as holiday lets and longer term lets outside of the holiday season.
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