If you own a furnished holiday let (FHL) in the UK you’ll be wondering what on earth is happening. There is increasing uncertainty, but not a lot of actual information. As a property owner involved in the holiday rental market, it’s crucial to stay informed about what is coming and understand the potential impact on your tax position.
Background of the Furnished Holiday Lettings regime
The furnished holiday lettings regime gives tax advantages to property owners who let out their furnished properties on a short-term basis. To qualify as an FHL, properties must meet specific criteria. These include being available for letting at least 210 days a year and actually let for at least 105 days within that period. Properties meeting these criteria benefit from various tax reliefs, including capital allowances, and more favourable Capital Gains Tax (CGT) treatment.
Recent changes and uncertainty
The March budget announced that the FHL regime was to be abolished from April 2025, but gave very little information about how that was going to work. Bearing in mind April 2025 is now less than a year away, it is really concerning that we still don’t know what is going to happen. That isn’t the only issue impacting on property owners and investors.
- Potential abolition or reform: Even if the government backs down from abolishing the FHL regime they are clearly keen to remove the tax advantages. While no definitive guidance has been issued, it’s essential to stay updated on any announcements or legislative changes that may affect your property business.
- Impact of COVID-19: The COVID-19 pandemic had a huge impact on the tourism and hospitality sectors, including furnished holiday lettings. Lockdowns and travel restrictions led to reduced occupancy rates, making it harder for property owners to meet the required letting days.
- Increased scrutiny from HMRC: As the government looks to tighten tax compliance and increase revenue, furnished holiday lettings have come under greater scrutiny. Property owners may face more rigorous checks to ensure they meet the qualifying criteria for FHL status. Maintaining accurate records and demonstrating compliance is more important than ever.
What might change from a tax perspective?
There are a few different areas that would be impacted if the FHL regime is abolished:
- Capital allowances: One of the primary benefits of the FHL regime is the ability to claim capital allowances (i.e. tax relief) on furnishings and equipment used in the property. If the regime is abolished or reformed, these allowances could be significantly reduced or eliminated, increasing how much tax you pay.
- Interest relief: If you own a buy to let property instead of an FHL then you only get basic rate relief on your mortgage interest – this means if you pay £10,000 mortgage interest in the year, you only get £2,000 off your tax bill, instead of potentially £4,500 if you are an additional rate taxpayer. This isn’t the case for FHLs, where mortgage interest is still deducted from your property income to work out the taxable profit, which can mean a significant tax saving.
- Capital Gains Tax: When you sell an FHL property you could also be eligible for Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) which means paying 10% tax on the gain instead of 18% or 28%. If the FHL regime is abolished you could therefore pay more than double the amount of tax on the gain.
What steps can I take to reduce the risks
Even though we just don’t know what is going to happen with the FHL regime, there are still some steps you can take to reduce the risks:
- Stay informed: Keep an eye on the latest developments in tax policy and legislation affecting furnished holiday lettings. Subscribe to industry news, follow updates from HMRC, and check in with your accountant regularly.
- Review your portfolio: Check your property portfolio to see if it still meets the FHL criteria. If not you may still be OK thanks to the period of grace election.
- Keep detailed records: Make sure you have full and accurate records of your letting income and expenses. If HMRC want to check if your property qualified as an FHL it is critical to have this documentation in place. We recommend using Xero for your property accounts, but you will also need to separately track when the property was available for let, and the occupancy rates.
- Seek professional advice: Engage with a knowledgeable accountant who specialises in property taxation. At Starfish Accounting, we provide tailored advice and support to help you navigate these changes and make informed decisions about your investments.
There is significant uncertainty surrounding the future of the furnished holiday lettings regime. Make sure you stay informed, and are up to date with your record keeping for your FHLs. If you have any questions or need personalised advice, don’t hesitate to reach out to our team. We’re here to support you every step of the way.
