Owners of furnished holiday lets (FHL) in the UK should prepare for a significant tax increase of approximately 20% starting next month, according to a warning from an accountancy firm.
The government has announced plans to remove several tax reliefs that have long been available to FHL owners. These changes aim to align the tax rates of short-term holiday lets with those applied to other rental properties.
Previously, FHLs benefited from favourable tax treatment due to their classification as short-term lets. This allowed owners to claim reliefs designed for businesses rather than standard rental properties.
One key advantage under the old system was the ability to claim capital allowances on furniture and equipment used in the property. This provided tax deductions that helped reduce overall liabilities for landlords.
In addition, FHL owners enjoyed more favourable inheritance tax conditions, making these properties an attractive investment from an estate planning perspective.
The removal of these reliefs means that FHL owners will now face higher tax bills, potentially impacting their profitability and future investment decisions.
Experts are advising landlords to review their financial strategies and prepare for the upcoming changes to avoid unexpected tax burdens.
Those who have relied on tax benefits to make their holiday let business viable may need to reconsider their pricing models or explore other cost-saving measures.
Industry professionals have raised concerns that these changes could discourage investment in the short-term rental market, potentially leading to a reduction in available holiday lets.
As the new tax rules come into effect, landlords should stay informed and seek professional advice to navigate the financial impact of these reforms.
The UK government has confirmed that the Furnished Holiday Let (FHL) tax regime will be abolished next year. The changes will take effect from 6 April 2025 for income tax and 1 April 2025 for corporation tax.
According to Paislei Godley, associate director at Prime Accountants Group, the government views this reform as a step toward tax fairness, aligning the rates of holiday lets with those of standard residential rentals.
One key motivation behind the change is the housing crisis in popular holiday destinations such as Cornwall. The government believes that restricting tax advantages for holiday lets may discourage investors from purchasing second homes in areas where local residents struggle to afford property.
By removing these tax reliefs, the government aims to reduce demand for short-term holiday rentals, making more housing available for full-time residents. This could help ease housing shortages in tourist hotspots across the UK.
Godley suggests that this move benefits HMRC in two ways. First, it discourages further investment in FHLs by making them less financially attractive. Second, it encourages landlords to convert existing holiday lets into long-term rental properties.
If more landlords shift their properties to the long-term rental market, this could help increase housing availability and stabilise rental prices for local communities.
However, some industry professionals argue that these changes could negatively impact tourism-dependent areas, where short-term lets play a crucial role in the local economy.
Landlords who rely on FHL income may now need to reconsider their business strategies, either by adjusting their rental models or exploring other investment options.
As the deadline for these tax reforms approaches, property owners should seek professional financial advice to understand the full implications and plan accordingly.
With these changes on the horizon, the UK’s rental market may see a shift in the balance between short-term holiday lets and long-term rental properties.
Paislei Godley has estimated that the upcoming tax changes could lead to an annual increase of around £1,400 for higher-rate taxpayers who own furnished holiday lets (FHLs).
For example, a landlord earning £25,000 in gross rent while paying £8,700 in expenses—including £5,000 in mortgage interest, £1,000 for furniture, £600 for repairs, £600 for cleaning, and £1,500 in management fees—would have previously generated a taxable profit of £16,750. Under the current FHL rules, their tax bill would be £6,700.
However, once the FHL tax regime is abolished, the same landlord would face a tax bill of £8,100, highlighting the financial impact of the upcoming changes.
Godley has outlined several key adjustments that FHL owners need to prepare for starting in April 2025. One major change is the loss of Capital Allowances. Landlords will no longer be able to claim tax relief on new furniture or appliances, instead reverting to domestic items relief when replacing household goods.
Finance costs will also be affected. Individual landlords will still receive tax relief on mortgage interest, but only at the basic income tax rate of 20%. Previously, they could deduct the full amount at their highest tax rate, which provided a greater benefit.
Losses from an FHL business, which could previously be carried forward and offset against future profits from UK or overseas properties, will now be pooled with other UK rental income. This means landlords may not be able to offset losses as efficiently as before.
Capital Gains Tax (CGT) rules are also changing. Landlords will no longer be able to defer CGT by reinvesting in new business assets. Additionally, the lower tax rate for Business Asset Disposal Relief (BADR) will no longer apply, meaning property disposals will be taxed at the standard CGT rate for residential properties.
Another significant change involves pension contributions and National Insurance. Income from FHLs will no longer count as relevant UK earnings for pension tax relief calculations, potentially reducing the amount landlords can contribute tax-efficiently. Class 2 and voluntary Class 3 National Insurance contributions will also no longer apply to FHL income.
With these reforms set to take effect in April 2025, FHL owners should reassess their financial planning and explore alternative investment strategies. Consulting a tax professional may be crucial to navigating the new tax landscape and mitigating potential losses.
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