Numerous key benefits currently available to furnished holiday lettings (FHL) businesses as a result of the abolition of the regime in the latest UK budget.

This will have a significant impact of the holiday letting industry tens of thousands of jobs as well as raising around £35m in 2025/26, rising to £245m in 2028/29.

Current legislation states that interest incurred on loans for the purpose of a furnished holiday letting business are treated as a deduction from rental income reducing the taxable profits of the business.

This is set to change from 6 April 2025 where interest for businesses run by individuals will no longer be available as a deduction.  Instead, relief will be given as a 20% tax credit from the individual’s tax liability.

Higher rate taxpayers will see a reduction in the tax relief obtained for interest to the 20% rate.    Furnished holiday letting assets held by individuals are currently treated as trading assets. As such capital gains on the disposal of these assets may qualify for business asset disposal relief: where they qualify, gains up to the lifetime limit of £1m would be taxed at a rate of 10%.

From 6 April 2025 these assets will be classed as investment assets, and as such, any gains will be subject to the Capital gains tax (CGT) tax rate of 18% for profits within the basic rate band or 24% for profits subject to the higher rate band.  

Gains on the disposal of a furnished holiday let would currently qualify for CGT rollover relief if they are replaced with a qualifying asset. A claim can be made to deduct the capital gain from the tax base cost of the new asset, thereby deferring the capital gain. Under the new rules this specific relief is only available for investment properties subject to compulsory purchase orders.    Expenditure incurred on qualifying assets for a furnished holiday letting business are currently eligible to claim capital allowances.

As the letting of FHL properties will now be classed as residential investment properties, such relief will be withdrawn from 6 April 2025.  Existing legislation for residential investment properties mean that they will now only be able to claim a deduction from profits for the cost of replacing domestic items.

Tax relief for pension contributions by individuals is currently limited to contributions of the higher of £3,600 or 100% of net relevant earnings

Currently, profits from furnished holiday lettings are treated as relevant earnings required when calculating pension contributions. From 6 April 2025, those individuals will no longer be able to rely on profits of a furnished holiday lettings business to support obtaining tax relief for their pension contributions.

Those affected by the significant loss of tax benefits from April 2025 may choose to sell their property after 6 April 2024. At this point they will be able to benefit from the reduction in the higher rate of CGT for residential property gains which is due to drop from 28% to 24%

It is clearly now less attractive to own holiday lets and changes in the legislation make it more attractive to sell them. The chancellor is clearly hoping that this will lead to significant numbers of property owners attempting to sell their holiday homes in the 2024/25 tax year ahead of the changes. It remains to be seen whether or not these changes will achieve the desired effect.

Delriene Smith

Boss Money Moves