Blog, Landlords

FHL abolition: What landlords need to know

10 min read

The abolition of the Furnished Holiday Letting (FHL) tax regime on April 6, 2025, will significantly affect landlords who have previously benefited from its provisions. HMRC has announced the abolition of the FHL scheme, prompting questions for property owners. Thankfully, they’ve recently issued some clarifications to ease the transition. However, several vital uncertainties remain. In this blog, we will explain the intricate landscape of FHL and provide solutions to navigate these changes and ensure a smooth transition for your business.

What is the FHL abolition?

The Furnished Holiday Lettings (FHLs) tax regime has historically provided landlords with considerable tax benefits, rendering them a compelling choice for investment. These properties are typically holiday homes rented out for short durations, attracting tourists and visitors. They are usually furnished and equipped to ensure guests enjoy a comfortable stay right from arrival.
 
Under the FHL regime, landlords enjoyed several tax incentives. One key advantage was the ability to claim total mortgage interest relief as a business expense. This means that the interest paid on mortgages for these properties could be deducted from taxable income, effectively lowering the amount of tax owed. 
 
Starting in April 2025, these tax benefits associated with Furnished Holiday Lettings will be eliminated and level the playing field from a taxation perspective with other property income and gains. This change is expected to have a considerable impact on landlords who rely on these tax breaks to enhance the financial viability of their rental properties. As a result, many landlords may need to reassess their investment strategies in light of the upcoming shifts in tax policy.

Key clarifications on FHL abolition from HMRC

HMRC’s recent clarifications provide some much-needed guidance and highlight areas requiring further explanation. Let’s delve into the key points:

Business cessation vs. FHL abolition:

It’s essential to understand the distinction between the abolition of the FHL scheme and the actual cessation of a business. HMRC clarifies that the abolition itself doesn’t automatically constitute a business closure. For it to be considered a business cessation, landlords must completely cease all letting activity with no intention to resume. This distinction is crucial for claiming Capital Gains Tax (CGT) relief on property disposal. Business Asset Disposal Relief (BADR), which offers a lower CGT rate, will only be available if the FHL business ceases trading before April 2025.

Jointly held property:

Following the recent changes, HMRC has clarified the handling of income and loss distribution for jointly owned holiday lets. Without a specific agreement among the joint owners, any profits and losses will be divided by the ownership percentages. However, joint owners can establish a different distribution arrangement if appropriately documented.

Capital Gains Tax (CGT) relief:

A significant area of uncertainty concerns capital gains tax (CGT) relief for the sale of furnished holiday let (FHL) properties after April 2025. With the proposed changes, the implications of Section 198 of the Capital Allowances Act 2001—which previously allowed property owners to allocate the purchase price between the value of fixtures and the property itself—may become less clear. 
 
This potential shift raises essential questions about how these changes could affect their tax obligations. Therefore, property owners must fully understand the CGT implications of selling FHL properties under the new regulations.

Remaining questions for landlords

While HMRC’s clarifications offer some relief, several key questions remain unanswered for landlords:

Transitional provisions:

The transitional provisions concerning capital allowances and the treatment of accumulated losses under the Furnished Holiday Letting (FHL) regime remain somewhat ambiguous. This ambiguity could have significant implications for landlords preparing their tax calculations for the upcoming 2024/25 tax year. 
 
Given the complexities associated with these transitions, landlords should understand these aspects to navigate these uncertainties effectively. Expert guidance can help landlords understand how these provisions impact their financial responsibilities and strategies.

Treatment of existing stock:

A significant issue that still requires resolution is how taxes will be handled for the current furniture and equipment found in FHL properties. Starting from April 2025, the classification and tax implications for these assets are not clearly defined, which poses a challenge for landlords aiming to claim capital allowances on such items. 
 
Without clear guidelines, property owners may be unsure of their eligibility for claims, potentially affecting their overall tax position. Property owners need to understand these concerns while staying informed about the latest updates to address these concerns adequately.

Impact on different letting models:

The tax consequences for various letting models following the proposed abolition of the current FHL regime are still not entirely understood. It’s essential to identify whether there will be differing tax treatments for short-term lets, long-term lets, or serviced apartments. Each letting model may have unique implications under the new tax regime, which could significantly affect landlords’ tax planning strategies. 
 
Grasping the nuances of how your particular letting model will be affected is crucial for making well-informed choices and strategising successfully for the future. Engaging with a qualified tax advisor can help clarify how these changes affect individual circumstances.

Recommendations for property owners

With the FHL abolition on the horizon, landlords are advised to take proactive steps. Here’s what you can do:

Review your FHL operations and tax implications:

Conduct a thorough review of your FHL business, considering income sources, expenses, and existing tax strategies. There is a window of opportunity prior to the change on 6 April 2025.

Consult a qualified accountant:

It is crucial to seek advice from a qualified accountant specialising in property rentals. They can help you understand how the FHL abolition will affect your specific circumstances and advise on tax optimisation strategies under the new regime.

Maximise benefits of professional advice:

A proficient accountant can provide invaluable guidance in manoeuvring through intricate and evolving tax regulations. They can assist in optimising your tax strategy by leveraging available allowances and deductions, thereby effectively minimising your overall tax liability.

Conclusion

HMRC’s clarifications on the FHL abolition are a step forward, but uncertainties linger. It’s vital to understand the key takeaways: the FHL regime will be abolished in April 2025. Some clarifications have been provided, but crucial questions remain unanswered. Seeking professional guidance from experienced chartered accountants is essential to navigate the changes and ensure a smooth transition for your property rental business.
 
At Golding Accountancy, we have a proven track record of helping landlords navigate complex tax changes. Our tax experts are recognised for delivering personalised advice and support. To optimise your tax position and minimise tax liability. Contact us today to schedule a consultation and ensure your business is well-prepared for the future.
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