On July 29th, the Government released draft legislation aimed at ending the FHL tax regime. Once this is enacted, starting from April 6, 2025, individuals running FHL businesses will lose several significant tax benefits.

Currently, interest on loans taken out for a furnished holiday letting business is deductible from rental income when calculating taxable profits. However, from April 6, 2025, interest for these businesses operated by individuals will no longer be an allowable deduction. Instead, relief will be provided as a 20% tax credit against the individual’s tax liability. This change will reduce tax relief for higher-rate taxpayers from 40% or 45% to just 20%.

Capital gains on the disposal of FHL assets by individuals are currently eligible for business asset disposal relief, meaning gains up to £1 million are taxed at 10%. From April 6, 2025, these gains will be taxed at the standard Capital Gains Tax (CGT) rates of 18% for basic-rate taxpayers or 24% for higher-rate taxpayers. If the Autumn Budget on October 30th introduces changes to the CGT rate, these rates could increase further.

Gains from selling an FHL property currently qualify for CGT rollover relief, allowing owners to defer the tax if they reinvest in another qualifying asset before April 5, 2025. After this date, rollover relief will only be available for investment properties in cases of compulsory purchase. Deferred gains will be taxed at the prevailing rate when the charge occurs, which could be higher than the current rate.

Expenditure on qualifying assets for an FHL business is presently eligible for capital allowances. This relief will be withdrawn from April 6, 2025, although existing capital allowances pools can be carried forward. Landlords planning capital improvements should consider completing them before this date to take advantage of the current capital allowances.

From April 6, 2025, only a deduction for the cost of replacing domestic items will be allowed for expenditure incurred, rather than capital allowances.

Additionally, tax relief for pension contributions by individuals is limited to the higher of £3,600 or 100% of net relevant earnings, which currently includes profits from FHLs. After April 6, 2025, individuals relying on these profits for pension contribution tax relief may need to seek advice on their options.

Landlords must now carefully assess their situation and plan ahead, considering whether to maintain their current arrangements, sell the property, or transfer it to family members. Those considering selling should be mindful of the reduced annual gains exemption and the need to report and pay tax on any gains within 60 days of the sale.

For those planning to keep the property, incorporating it into a company structure might be an option. While companies pay 25% on net profits, and interest on borrowings can be more cost-effective, there are setup costs and potential complexities with lenders to consider. Additionally, withdrawing profits would incur both corporate and personal taxes.