With significant changes to the Furnished Holiday Let (FHL) regime coming into effect in April 2025, owners of holiday rental properties face crucial decisions about their tax position and business structure.
What are the key upcoming changes to FHL?
The favourable tax treatment for FHLs is being abolished, meaning they will be treated the same as other rental properties for tax purposes.
Key changes include:
- Loss of capital allowances – FHL owners will no longer be able to claim capital allowances on furniture and fixtures. Instead, relief may be available under the ‘replacement of domestic items’ rule, subject to conditions.
- Treatment of losses – From April 2025, losses will be treated as general rental losses, offsetable against any rental income in the same business.
- Changes to Capital Gains Tax (CGT) – Business Asset Disposal Relief (BADR), which allows CGT at 10 per cent on disposals, will no longer apply after April 2025. The new standard rate will be 24 per cent for residential property sales.
- Rollover and gift holdover reliefs – These will no longer apply to FHL properties from April 2025, significantly impacting tax planning for disposals or family transfers.
Some property owners may benefit from the upcoming changes. Those with a mix of long-term rental and FHL properties, along with unused FHL losses, will be able to offset these losses against other property income starting in 2025/26.
Additionally, the changes will simplify tax reporting by eliminating the need for separate records.
Should you operate through a limited company?
Many FHL owners are now considering whether incorporating their business would be beneficial.
Operating through a limited company can offer advantages, including:
- Lower tax rates – The main Corporation Tax rate is currently 25 per cent, or 19 per cent for businesses with profits under £50,000. This can be a more favourable option compared to personal tax rates, especially for higher earners who may face rates of up to 45 per cent.
- Flexibility in income extraction – Profits can be retained in the company to defer higher personal tax liabilities.
- Business rates planning – Structuring property ownership through multiple companies can potentially reduce liability for VAT and small business rates relief.
However, incorporation also has its downsides, including increased administrative work such as annual filings and Corporation Tax returns.
Moving an existing property into a limited company may trigger CGT and Stamp Duty Land Tax liabilities, reducing the potential tax benefits.
You should seek professional advice to weigh the benefits and drawbacks of operating through a limited company to understand if incorporation will suit your needs.
What should you do now?
If you own a Furnished Holiday Let (FHL), it’s important to consider your options before the rules change in April 2025.
If selling the property aligns with your plans, doing so now could allow you to benefit from the lower 10 per cent tax rate.
Alternatively, gifting the property might be a strategic part of your succession planning.
With the abolition of the FHL regime potentially leading to higher tax liabilities due to the loss of CGT reliefs, seeking professional advice is highly recommended.
If you would like to discuss how these changes may impact you and explore your options, please get in touch.
