The government published draft legislation confirming that it was going to proceed with the abolishment of the FHL scheme, noting that it would come into effect on or after 6 April 2025 for income tax or capital gains tax (CGT) and from 1 April 2025 for corporation tax and for corporation tax on chargeable gains.

Former Chancellor Jeremy Hunt had proposed to remove the FHL scheme in the Budget earlier this year, adding that it would raise £245m per year by 2028-29.

The FHL scheme means landlords can claim CGT relief for trades, are entitled to plant and machinery capital allowances, and products count as earnings for pension purposes. They can also deduct mortgage interest payments from rental income.

Once the scheme is repealed, these tax advantages will be removed, and furnished holiday let properties will form part of the person’s UK or overseas property business and come under the same rules of non-furnished holiday let businesses.

The government has proposed “specific transitional rules” around capital allowance treatments, how losses are considered, and reliefs landlords are eligible for.

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It said that the change “promotes fairness and aligns the tax rules for furnished holiday lettings with those for other property businesses”.

 

FHL landlords should check extra tax and consider sale or gifting options

Ben Handley, tax partner at BDO, said that now draft legislation had been published that confirmed the government was going to proceed with abolishing the FHL regime, it would be “sensible for anyone affected to consider their options now, plan ahead and make use of the tax reliefs currently available.”

He continued: “If you usually let out your holiday home sufficiently for it to qualify as a furnished holiday let – so 105 days out of 210 days available for letting – then there are choices to be made. If the current arrangements suit you, there may be no need to change but it is sensible to check how much extra tax you will pay.

“Another option is to sell the property before 5 April 2025. Although the sale may qualify for business asset disposal relief, and even though the headline rate of tax is also now reduced to 24% compared to 28% in the prior tax year, the annual gains exemption has also reduced to £3,000, so it would be sensible to seek advice on your likely tax charge before you complete the transaction. Remember that capital gains on property need to be reported and the tax paid within 60 days of completion.”

Handley said another option could be to pass the property to family, as giving an asset to a “connected relative” is treated as a “disposal at market value”.

“However, as a FHL property is a business asset, it may be possible to elect to ‘hold over’ any capital gain on disposal to relatives. Of course, if they subsequently sold it, capital gains tax would be payable on any historic[al] gains at the prevailing rate at that time, which could be higher than the 24% rate currently.

“In addition, the gift may have inheritance tax implications, particularly if you continue to use the property without paying rent, so consider your options carefully,” he noted.

Handley noted that if a landlord wanted to carry on letting the property, it would be worth investigating whether putting it into a company structure would be “beneficial”.

“While companies pay only 25% on net profits and deductions for interest on borrowings can be more cost-effective, there can be costs on setting the company up and transferring in the property and issues with lenders. Equally, if you want to withdraw profits, there will effectively be two sets of taxes to pay (personal and corporate) – so incorporating a letting business needs very careful thought.

“Of course, if your holiday home does not qualify as a furnished holiday let, there is no pressing need to act but, if you were considering it anyway, the current 24% capital gains tax rate – which could go up at the Autumn Budget – may mean it is a good time to sell,” he said.