The end of Furnished Holiday Lets (‘FHLs’) is nigh!

The final Conservative Budget in March announced that the FHL regime – which offers various advantages for individuals and companies who let residential properties on a short-term basis – would be abolished from 6 April 2025. However, the general election was announced before any draft legislation could be brought forward, leaving FHL owners wondering whether Labour would offer a reprieve.

These hopes have sadly been quashed, as the new Chancellor confirmed earlier this week that she will press ahead with the changes.

Current regime

As a recap, the main benefits of FHLs over normal buy-to-lets are:

• Business Asset Disposal Relief (‘BADR’) may apply to gains arising when the business is disposed of. This reduces the rate of capital gains tax to 10% on up to £1 million of gains, and so compares favourably to the 24% rate that usually applies to residential property gains.
• Capital allowances can be claimed on fixed asset expenditure. This is more generous than the regime for other residential property letting businesses, where relief is restricted to replacements of domestic items (and therefore does not include things like kitchens, bathrooms etc.).
• For individuals owning FHLs, full relief is available for mortgage interest and other finance costs, whereas ordinary buy-to-let landlords are restricted to basic rate (20%) relief as a tax reducer.

New regime from 6 April 2025

The abolition of the FHL regime will have the following main consequences:

BADR

FHL owners may continue to claim BADR on qualifying disposals made up to 5 April 2025. After that date, BADR will not apply except in the limited circumstance where the FHL business ceases on or before 5 April 2025 and the property is disposed of within three years of cessation.

Capital allowances

Capital expenditure incurred after 5 April 2025 will not qualify for capital allowances but may instead be eligible for ‘replacement of domestic items relief’ in line with other property businesses.

If the business continues, existing capital allowance pools can continue to write down with no disposal value brought into account. This will come as a relief to FHL owners who have made large capital allowance claims because there were fears that, in coming out of the regime, balancing charges could apply.

Relief for finance costs

As expected, relief will no longer be available for finance costs where the FHL is owned outside of a company. Instead, the 20% tax reducer given to ordinary buy-to-let landlords will apply.

Our view

In some cases, we anticipate that the restriction to finance costs will push the business into a net (after tax) loss-making position. Even for businesses not affected by this change, the removal of BADR will have a costly impact upon any future sale.

This could lead some FHL owners to decide to sell up while the 10% rate is available, but they will have to act quickly. As noted above, BADR will only apply to disposals up to 5 April 2025 or where the business has ceased by that date and the disposal takes place within three years of cessation.

The three-year window will offer a planning point in some situations. For example, if the FHL is standing at a gain of say £1,000,000, then the removal of BADR could cost up to £140,000 in extra capital gains tax. If the property cannot be sold by 5 April 2025 it may be worth the owner ceasing to rent it out in the hope of finding a buyer within the three-year run-off period.

Other business owners that hold their FHLs outside a company may want to look at incorporating. While the draft legislation includes anti-forestalling provisions for certain disposals using unconditional contracts, there does not appear to be anything to stop BADR from applying to incorporations carried out before 6 April 2025. Alternatively, incorporation relief may apply. However, there may be stamp duty land tax (‘SDLT’) and other costs to consider in these scenarios.

The take home message is that FHL owners need to work out what they want to do before 6 April 2025.

The weekly Tax Bites are not intended to constitute tax advice. The information provided in these articles is based on our understanding of current tax law; however, we do not represent or warrant the accuracy of the information contained therein, and any information provided may be incomplete or condensed. Furthermore, the suggestions contained within these articles are for discussion purposes only and should not be relied on. You should seek formal tax advice before proceeding with any of the suggestions contained in this document.