Please note that the following may be subject to change following the General Election
Back in March, the Spring Budget announced significant changes to the Furnished Holiday Let (FHL) regime, set to take effect from April 2025. However, these proposals appear not to have progressed and are now in considerable doubt for early adoption. Despite this, it’s important to stay informed as, if the changes do go ahead, they will significantly impact how FHL properties are taxed.
This Tax Tuesday, we provide a detailed breakdown of what these changes could potentially mean for property owners, subject to firm guidance and clarity from HM Government if and when they proceed.
Mortgage Interest Deduction
Currently, mortgage interest on FHL properties is treated as a full deduction from rental income. This means that landlords can reduce their taxable rental income by the amount of mortgage interest paid. However, from April 2025, mortgage interest will be given as a 20% tax credit. This change primarily affects higher and additional rate taxpayers, who currently benefit from deducting mortgage interest at their marginal rate, potentially reducing their tax relief.
Capital Allowances
Under the present regime, FHL properties benefit from capital allowances, allowing owners to offset the cost of furniture, fixtures, and fittings against their rental income. This can significantly reduce the taxable profit from rental income. From April 2025, only a deduction for replacing domestic items will be allowed. This means that the cost of purchasing new capital items, such as furniture and fixtures, will no longer be eligible for capital allowances, limiting the tax relief available.
Pension Contributions
Profits from FHL properties are currently treated as relevant earnings for pension contributions, enabling owners to contribute more to their pensions and benefit from tax relief. Post-April 2025, FHL profits will no longer be treated as relevant earnings for pension contributions. This change may reduce the amount property that owners can contribute to their pensions with tax relief.
Capital Gains on Disposal
Capital gains on the disposal of FHL properties may currently qualify for Business Asset Disposal Relief, where gains are taxed at 10% up to £1 million. From April 2025, the normal higher residential property rates will apply to disposals. This means capital gains will be taxed at 18% for basic rate taxpayers and 24% for higher rate taxpayers.
Tax Treatment of Income
FHL income is currently taxed separately, and property owned jointly with a spouse can be taxed on one partner based on their tax status. However, from April 2025, FHL income will be taxed as normal rental income. Property owned jointly with a spouse will automatically be taxed in equal shares unless Income Tax Form 17 is completed and evidence that the beneficial interests in the property are unequal is provided, such as a declaration or deed. If your existing FHL is currently taxed on one partner, this may require discussion to reassess tax planning strategies.
How can we help?
These upcoming changes represent a significant shift in the taxation of Furnished Holiday Lets, affecting deductions, pension contributions, capital gains treatment, and income tax treatment. Property owners should consider the implications of these changes and seek advice to adjust their tax planning strategies accordingly.
If you need guidance in navigating the new FHL regime, please contact your relationship principal, email tax@haroldsharp.co.uk or call 0161 905 1616 if you’d like to discuss.
The author takes every care in preparing material to ensure that the content is accurate and up to date. However, no responsibility for loss occasioned to any person acting or refraining from acting as a result of this material or from making use of this material can be accepted by the author.