Changes to tax benefits for furnished holiday lettings

Changes to tax benefits for furnished holiday lettings

The 2024 budget included the announcement of tax benefit changes for those with furnished holiday lettings (FHL) which will mean that individuals operating FHL businesses will lose a number of tax benefits.

Currently, interest incurred on loans for the purpose of a furnished holiday letting business are treated as a deduction from rental income in calculating taxable profits of the business.

From 6 April 2025, interest for businesses operated by individuals will cease to be a deduction and relief will instead be given as a 20% tax credit from the individual’s tax liability.

For higher rate taxpayers, this will mean a reduction in tax relief for interest to the 20% rate. As trading assets, capital gains on the disposal of furnished holiday letting assets by individuals currently may qualify for business asset disposal relief, where they can qualify gains up to the lifetime limit of £1m which would be taxed at a rate of just 10%.

As investment assets, from 6 April 2025 such gains will be subject to the Capital gains tax (CGT) tax rate of 18% for profits within the standard rate band or 24% for profits within the higher rate band.   

Other changes include – gains on the disposal of a furnished holiday let would currently qualify for CGT rollover relief, if a replacement qualifying asset is purchased then a claim can be made to deduct the capital gain from the tax base cost of the new asset, thereby deferring the tax point of the gain. Such relief is only available for investment properties in cases of compulsory purchase. Expenditure on qualifying assets for a furnished holiday letting business are currently eligible for capital allowances.

Currently, profits from furnished holiday lettings are treated as relevant earnings. However, from 6 April 2025, individuals who rely on profits of a furnished holiday lettings business to support obtaining tax relief for their pension contributions may need to seek appropriate advice, due to the changes that will have come into effect.

The tax changes which are coming into effect from April 2025 will make it less attractive to own holiday lets and therefore it is expected that some owners of these properties will look to sell them. It would therefore seem that the chancellor may be hoping that this will lead to property owners putting their holiday homes on the market in the 2024/25 tax year, possibly with a view that this could lead to an increase in the availability of rural homes to buy or longer-term residential lettings.

If you are renting out a holiday home and are looking for advice going forward with a view to understanding the changes and what this will mean to you, please get in touch with us here at Kennedys Accounting, where one of our specialist members of the team will be pleased to assist you.

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