Abolition of furnished holiday let tax regime

A policy paper and draft legislation have been issued confirming that Labour are moving forward with the proposal of the previous Government to remove the tax advantages of short-term holiday lets, known as furnished holiday lets (FHL). Currently, there are notable tax benefits on property which qualifies as a FHL.

The changes are effective from 1 April 2025 for corporation tax and 6 April 2025 for income tax and capital gains tax. These affect four key areas:

1. The finance cost restriction that applies to other property business by restricting relief to basic rate, will be implemented against holiday lets
2. Capital allowance treatment is currently available on the cost of providing furniture and equipment including white goods and beds etc. This will be removed and such costs will instead be eligible for replacement of domestic items relief
3. Business Asset Disposal Relief (BADR) is currently available on the disposal of some qualifying FHL properties. This results in qualifying gains being taxed at a capital gains tax rate of 10%. The changes withdraw this relief. Anti-forestalling measures also apply to stop unconditional contracts to take advantage of the current rules.
4. Profits from FHLs are treated as relevant earnings for pension contributions. FHL income will no longer be considered for this purpose.

Technical points

Capital Allowance Pools
Existing pools of expenditure on FHLs can continue to claim writing-down allowances due from the pool. However expenditure incurred on or after 6 April 2025 will not enter the pool and will instead be relievable under the replacement of domestic items relief rules.

FHL Losses
Any losses are currently carried forward and only available to be utilised against future profits of the FHL business. As such property will be considered part of any normal UK or overseas letting business post 6 April 2025, losses will be amalgamated with all profits and losses from letting business. Brought forward FHL losses will be available from 2025/26 against any other property letting business.

Business Asset Disposal Relief (BADR)
If a property business that qualifies as a FHL under current legislation ceases prior to 6 April 2025, BADR will continue to apply to a disposal occurring within 3 years of cessation.

Anti-forestalling – unconditional contracts
Draft legislation makes disposal of a FHL under an unconditional contract entered into since 6 March 2024, for conveyance or transfer after 6 April 2025 ineffective, and subject to normal CGT rules, if the purpose of the contract is to obtain capital gains tax relief under current FHL rules.

Corporation Tax: accounting period straddling 1 April 2025
If an accounting period straddles the commencement date, that accounting period is apportioned into two separate accounting periods.

For further information or advice please contact a member of our property tax team on 01903 234094.