Property investors are set to lose the tax benefits of furnished holiday lettings (FHLs) from next April.
The previous government had unveiled plans to abolish the FHL tax regime in the Spring Budget to help free up property stock and fund the National Insurance cuts.
But while the measure didn’t get through parliament ahead of the general election, the Labour government has resurrected the plans.
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HMRC put out a policy paper in July 2024 that confirmed the end of the FHL regime, which it says “promotes fairness and aligns the tax rules for furnished holiday lettings with those for other property businesses".
The industry had until mid-September to respond to a Treasury consultation on the changes.
The Professional Association of Self Caterers (PASC) trade body has criticised the speed of the changes, warning that it doesn't give micro-businesses time to transition.
"It will damage rural and coastal visitor economies, not only those in our sector, but pubs, restaurants, visitor attractions and more," the group says.
"None of these operators have done anything wrong, this is not a tax loophole, it is a tax regime that has been in place for 40 years.
"Any new policy must be proportionate and based on robust data, which can only be captured through the introduction of a proposed statutory registration scheme."
It is the latest blow for landlords who have seen the perks of property investing restricted in recent years with changes such as extra stamp duty charges on additional house purchases and the scaling back of mortgage interest relief.
"We have already had the increase in council tax for second homeowners, registration schemes and now investors are losing FHL allowances," says Katie Warren, director at holiday home buying agent Fixer Management Services.
"It will have a negative impact across the industry and won't solve the housing crisis."
She warns that holiday home owners may be forced to sell but the homes could still be unaffordable and unsuitable for first-time buyers, so it is unclear who would purchase them.
What is a furnished holiday let?
The furnished holiday lettings (FHL) tax regime has been around since the 1980s and was becoming a viable alternative to buy-to-let.
Landlords or second home owners could put their property on rental platforms such as Airbnb and claim full mortgage interest relief, unlike in the private residential sector.
Investors were also entitled to capital allowances for furniture and capital gains tax was reduced to 10% when the property is sold.
But HMRC’s latest policy paper suggests repealing the beneficial tax treatment “promotes fairness” by bringing the rules in line with other forms of residential property investment.
What are the furnished holiday let changes?
From April 2025, furnished holiday lets will be like other forms of buy-to-let investing.
Mortgage interest relief will be restricted to the basic rate of income tax.
Rather than being able to claim capital allowances for spending on the property, holiday home owners will be restricted to claiming tax relief.
Any income and gains earned from a holiday let will form part of the person’s UK or overseas property business and will be treated in line with all other property income and gains.
This means a higher or additional-rate taxpayer would have to pay 24% capital gains tax on profits from the sale of a holiday let above £3,000, rather than 10% currently.
There are some transitional rules including allowing investors to carry forward losses from previous years up to April 2025 but anything after that is treated as part of an overall property portfolio.
Tax advisory firm Zeal suggests holiday let owners could lose an average of £1,890 a year in tax relief, based on an average mortgage balance in the UK of £189,000, and assuming they are a higher-rate taxpayer.
The tax relief changes will only affect you if you have a mortgage on the holiday let but reduced capital allowances and potentially higher capital gains tax could hit those trying to sell a property.
Warren suggests anyone planning work on holiday homes should do so now to benefit from capital allowances before they disappear from April next year and will need to make sure their properties are as cost-effective as possible.
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