With the recent budget, we are now facing the end of the Furnished Holiday Lettings (FHL) tax regime in April 2025. This shift removes yet another tax-beneficial asset, limiting reliefs that have made holiday lets an effective option for diversification within farming businesses.
Originally introduced by then Chancellor Jeremy Hunt in the March 2024 Budget to align holiday lets with standard rental properties, this measure has now been upheld by the Labour government – though, would we really expect Rachel Reeves to consider any approach that might support the sector. With recent heavy cuts to the Basic Payment Scheme (BPS) alongside restrictions to Agricultural Property Relief (APR) and Business Property Relief (BPR), farmers are clearly bearing the brunt of these tax changes – another effort to shore up the ever-widening black hole of public spending, set to get worse...
However, there remains a window to claim existing capital allowances before these reliefs disappear. Here’s how to make the most of what’s left and stay compliant with HMRC’s new demands.
The End of the FHL Tax Regime: What to Expect
With the FHL tax regime set to end in April 2025, property owners will see several key changes in how they are taxed. Here’s an overview:
Capital Allowances
Currently, property owners can claim capital allowances on fixtures and fittings in FHLs to reduce taxable income. After April 2025, capital allowances will no longer be available, with only Replacement of Domestic Items Relief covering the replacement of existing items (not initial purchases). Owners have until 5 April 2025 (for individuals) or 31 March 2025 (for companies) to add unclaimed capital allowances to their pool, allowing deductions to continue beyond the regime change.
Finance and Mortgage Interest Costs
Under the current FHL rules, finance costs can be fully deducted, benefiting owners with mortgage or loan interest. After April 2025, individual landlords will be limited to basic rate relief (20%) for finance costs, aligning with standard residential lettings. Companies are unaffected by this change.
Capital Gains Tax (CGT) and Anti-Forestalling Rules
FHL properties currently benefit from CGT reliefs, such as Business Asset Disposal Relief, Rollover Relief and Holdover Relief, which will end with the FHL regime repeal. New anti-forestalling measures mean that property sales contracts signed on or after 6 March 2024 and completed after 6 April 2025 won’t qualify for these reliefs. To secure these CGT benefits, any property sales or transfers should be completed before these dates, therefore, forward planning is curial!
Treatment of Losses
Under the current rules, losses arising specifically from capital allowances on FHL properties can be offset against other income, offering a unique tax planning opportunity within the FHL framework.
However, from April 2025, with the abolition of the FHL regime, this option will no longer be available. After this date, all FHL losses, including those from capital allowances, will be treated as general property losses. This means they will be restricted to offsetting property income only, aligning with the standard rental property rules and removing the current flexibility.
Pensionable Income
FHL profits will no longer be classified as pensionable income. This means that income from holiday lettings will be treated like other rental income, which is excluded from eligible earnings for pension contributions. For those using FHL income to boost their pension allowances, this change is significant, removing an efficient method of contributing toward retirement planning.
Jointly Held Property
Under the new rules, FHL income will follow standard joint property income rules, meaning it defaults to each owner’s share unless otherwise agreed. Married couples and civil partners must submit Form 17 to HMRC if they wish to allocate income based on their actual ownership share.
Eligibility for Class 2 National Insurance Contributions (NICs)
Though FHL income will no longer be considered as trading income, eligibility to pay voluntary Class 2 NICs remains, allowing owners to maintain state benefits qualification if desired.
VAT and Business Rates
VAT and business rates treatment remain unchanged for FHLs, so properties meeting VAT thresholds will still be standard-rated, and eligibility for business rates (instead of Council Tax) will continue to apply – provided the FHL conditions remain met.
Still Time to Claim: Maximise Capital Allowances Before April 2025
If you haven’t yet claimed capital allowances on qualifying fixtures and fittings in your FHL property, there’s still an opportunity to do so before the April 2025 deadline. Claiming allowances on embedded fixtures, such as heating systems, electrical installations, and plumbing, before this cut off will allow you to carry forward these remaining allowances for future tax relief, even after the FHL regime ends.
Section 198 Election
If you recently purchased the property, you may be able to enter into a Section 198 election with the seller. This agreement fixes the value of qualifying fixtures and fittings, establishing a clear basis for capital allowances. This will need to be agreed 2 years after the purchase (with a potential to extend if being agreed via a tribunal decision), therefore, timing is crucial. Both the Fixed Value and Pooling requirements being an important part to this process with professional advice being advisable.
Section 562 Apportionment (if No Section 198 Election Was Made)
If no Section 198 election was made at the time of purchase, capital allowances could still be claimed through a “just and reasonable” apportionment of the purchase price under Section 562 of the Capital Allowances Act (CAA) 2001 - however, this is heavily dependent on the individual circumstances.
In these cases, a professional valuation is typically required to separate the value of qualifying embedded fixtures from other non-qualifying parts of the property. This valuation helps ensure a valid claim by identifying and quantifying each asset.
Handling Subsequent Claims
If the property was previously an FHL, it’s essential to confirm whether the prior owner claimed capital allowances on the fixtures. This step helps prevent double-claiming, which HMRC could challenge.
Here’s how to approach it:
Request Confirmation from the Seller: Ideally, ask the seller for written confirmation of any previous capital allowances claims. This helps clarify the status of any embedded fixtures and will avoid future complications.
Proceeding Without Confirmation: If you cannot obtain confirmation from the seller, consider preparing a statutory declaration. This declaration states that you’ve made reasonable inquiries to confirm no previous claims exist. While a statutory declaration won’t fully prevent HMRC from investigating, it demonstrates that reasonable due diligence was performed, which can be valuable if the claim is later questioned.
Valuation Based on Replacement Cost: In cases of uncertainty, using a replacement cost valuation (estimating the current cost to install the qualifying fixtures) can provide a more conservative basis for the claim, helping to minimize potential issues with HMRC if previous claims remain unknown.
Taking action now can provide significant tax relief, even beyond the April 2025 FHL regime change.
New HMRC Reporting Rules for Self-Catering Agencies
From January 2025, HMRC requires digital platforms and self-catering agencies to report specific information about property owners. Here’s what this means for you:
Reporting Requirements: Self-catering agencies must report details about:
Property (address, land registry number).
Owner’s Personal Information (name, address, National Insurance Number, VAT number).
Financial Information (total stays, rental income, commissions, net payments).
First Reporting Date: Reports are due by 31 January 2025 for properties listed after 1 January 2024. Properties listed before then are in a transitional period, with reporting starting in January 2026 for income earned in 2025.
Penalties for Non-Compliance: HMRC has strict penalties for agencies that don’t comply, including fines of up to £5,000 and continuing penalties of £600 per day for late reporting. Ensuring your agency has accurate information is essential to avoid reporting discrepancies.
Closing Thoughts…
The upcoming changes to the Furnished Holiday Lettings (FHL) tax regime mark a significant shift for property owners, especially those in the farming sector who have relied on holiday lettings as a valuable diversification tool. With April 2025 on the horizon, the ability to leverage capital allowances and offset certain losses is coming to an end, bringing FHLs in line with the more restrictive tax treatment of standard rental properties. For tailored advice and support to maximise your reliefs before these changes take effect, contact us at Mitchells.
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