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Kirk Rice Blog

Goodbye Furnished Holiday Lets (FHL)Written on March 13, 2024 by Kirk Rice LLP

Goodbye Furnished Holiday Lets (FHL)

In what is likely to be the final Budget of the current government ahead of the next general election, the Chancellor, Jeremy Hunt, made some announcements which were both designed to steal the thunder from Labour and to appeal to a wider voter audience in the hope of convincing a fed-up electorate that they have a credible plan to stimulate the economy and alleviate the effects of the cost of living crisis.

One announcement that surprised the tax profession was scrapping the Furnished Holiday Let (FHL) rules for short-term residential property lettings. This is due to take effect from April 2025.

The Chancellor hoped to demonstrate to people living in rural and coastal communities that the government have recognised that there are few properties available to rent or buy in the area in which they live and work and that by changing the status of rental properties in the area from FHL short-term lettings to longer-term investment property lettings, it would lead to more lettings becoming available, and to release more properties to buy as landlords decide to sell up. As an incentivisation for the latter, the Chancellor lowered the higher rate of capital gains tax on residential property sales from 28% to 24%, taking effect from 6 April 2024.

So, what will this mean for anyone owning a property that currently qualifies as a FHL?

  • The property income will become part of the individual’s normal UK or overseas residential investment property business rather than being reported as a separate property business. As such, rental losses from the former FHL will be relievable against rental profits from other rental properties.
  • There will be a loss of full mortgage interest relief against rental profits, which will be replaced by a 20% basic rate ‘tax reducer’. For FHL landlords with a high level of mortgage on the property paying high-interest charges on the loan, this will hurt and mean that taxable profits will increase.
  • Capital allowances will be lost (where they have been claimed in the past) and replaced with the ‘replacement of domestic items’ relief. Essentially, the relief allows for the deduction of the cost of replacing existing white goods, furniture and furnishings with new items on a like-for-like basis. We have yet to see if any transitional rules will be put in place to help move away from capital allowances. However, balancing charges may apply to the tax written down value of furniture and fixtures within the property where capital allowances were being claimed.
  • Where a property met all the qualifying conditions for an FHL on sale, the capital gain arising would be taxed at the rate of 10% (under the Business Asset Disposal Relief rules, subject to the £1m lifetime limit). From April 2025, normal capital gains tax rates for residential property will apply instead (at the rates of 18% and the new higher rate of 24%). The government has stated that there will be measures in place to prevent tax planning steps designed to artificially accelerate the disposal date of an FHL to ensure a sale before 6 April 2025. At present, there is no explanation of what that may mean.
  • FHL profits are currently treated as relevant earnings for pension contribution purposes. With the removal of the FHL status, future profits on these properties will cease to be considered when working out the levels at which tax relief may be obtained for pension contributions.

We wait to see whether or not the Chancellor’s plans have the desired effect, but it is likely to be well received in some communities. That said, there is also a question about whether the reduction in FHLs could negatively impact local tourism. Only time will tell.

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If you have any questions about how this will affect your Furnished Holiday Let, please email info@kirkrice.co.uk to arrange a call with the appropriate specialist.

Please note: This article is correct as at the publication date. The answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made. The information is based on current tax legislation which may change in future.