Budget 2024: Furnished Holiday Let Tax Changes

What was announced in the budget?

From April 2025, the government will abolish the Furnished Holiday Lettings tax regime, eliminating the tax advantage for landlords who let out short-term furnished holiday properties over those who let out residential properties to longer-term tenants.

How will the Budget tax changes affect holiday lets?

Nadeem Raziq, Head of Tax at Provestor explains the five key ways the FHL tax changes will impact holiday let owners.

Changes to mortgage interest relief

Currently, FHL owners can claim 100% of the mortgage interest as an expense.

Starting April 2025, holiday let owners will lose mortgage interest tax relief, aligning them with the Section 24 rules that previously only affected residential landlords. This shift eliminates the tax advantage FHLs enjoyed, allowing them to deduct full mortgage interest from profits, reducing taxable income.

The change will particularly affect those in higher tax brackets, increasing their tax liabilities, making strategic tax planning even more important. It also may lead to a shift in ownership structures, with a potential increase in FHLs being purchased through limited companies to mitigate the tax impact, mirroring trends in the buy-to-let market.

Changes to profit splitting for jointly owned FHLs

April 2025 will bring an end to the flexible profit splitting for jointly owned Furnished Holiday Lets (FHLs), aligning them with traditional investment properties where income division is based strictly on ownership share. This change removes the tax planning advantage FHL owners currently have, which allowed for optimised tax liabilities through adjusted income allocations between owners. Previously, this flexibility could significantly reduce tax burdens by distributing more income to lower-earning partners.

The new rules could have significant tax implications for FHL owners, potentially pushing some into higher tax brackets and increasing their tax liabilities. FHL owners now face the challenge of reevaluating their investment structures and profit allocation strategies to comply with these changes while attempting to maintain tax efficiency.

Changes to pension contributions

Currently, rental income from a FHL is classed as Net Relevant Earnings (NRE) for pension purposes, allowing you to make tax-advantaged pension contributions

From April 2025, FHL income will no longer qualify as net relevant earnings for pension purposes. This shift decreases the capacity for tax-free pension contributions, impacting holiday let owners' retirement planning.

FHL owners, especially those relying on FHL income to meet pension contribution levels, must now urgently reconsider their financial and pension strategies in light of these changes. This involves a comprehensive review of their tax situations and long-term objectives, assessing the immediate effects on pension contributions and the overall viability of their FHL investments. We strongly advise getting advice from both a property tax advisor and a pension advisor.

Changes to reliefs when selling FHLs

A key change that will affect FHL owners planning on selling is the removal of Business Asset Disposal Relief (BADR) from April 2025. This currently allows a 10% capital gains tax rate on sales up to a lifetime limit of one million pounds per person - significantly lower than the usual 20%, which has been a key benefit for those looking to sell.

This will prompt many FHL owners to reconsider their exit strategies. With the closure of this window, owners planning on selling in the near future may need to accelerate their sales to take advantage of BADR before it expires.

Additionally, they will no longer qualify for Business Asset Rollover Relief, which offers an opportunity to defer capital gains tax by reinvesting in another qualifying asset. This can be particularly useful for holiday let owners looking to optimize their portfolios by replacing underperforming properties with more lucrative ones, enabling a tax-efficient transition.

Changes to claiming capital allowances expenses

A huge tax change for furnished holiday lets it the removal of capital allowances.

Currently, FHLs operate under business rules, allowing them to claim capital allowances for 100% of the costs on capital items such as fixtures, fittings, white goods, and integral features of the building, including electrical and plumbing equipment. This means that FHL owners can deduct these costs in full from their profits in the year they're incurred, significantly reducing taxable income.

However, with the removal of this benefit in April 2025, FHL owners need to carefully consider their refurbishment plans. It's vital to consider if current investments will remain beneficial in the long term, particularly for those planning to exit the FHL market.