QUESTION: I have a furnished holiday let on the north coast that I have owned for a number of years. I recall something being announced recently regarding changes that are coming down the track, but I am unsure how these changes will impact you. Can you provide some further information?
ANSWER: The government has announced a series of changes to the taxation of furnished holiday lets (FHLs) aimed at aligning their tax treatment with other property businesses. This move, which will take effect from April 2025, is designed to promote fairness in the tax system and eliminate the favourable tax advantages currently enjoyed by FHL owners.
The primary objective of these changes is to create a level playing field between furnished holiday lets and other property businesses. Currently, FHLs benefit from several tax reliefs and exemptions that are not available to other landlords. These include exemption from the finance cost restriction rules, more favourable capital allowances, access to reliefs from taxes on chargeable gains for trading business assets, and the inclusion of FHL income as relevant UK earnings when calculating maximum pension relief.
The distinction for FHLs was introduced in 1984, offering different and more beneficial tax treatment for short-term lettings within the property investment sector. However, the government now believes that these advantages have led to distortions in the property rental market, and that repealing these benefits will ensure a fairer tax system.
Key changes and their impact:
- Finance cost restrictions: Under the new rules, FHLs will no longer be exempt from the finance cost restriction rules. This means that loan interest for FHLs will be restricted to the basic rate of Income Tax, bringing them in line with other residential landlords. This change will affect the profitability of FHLs that are heavily leveraged, as the cost of borrowing will no longer be fully deductible.
- Capital allowances: The favourable capital allowances currently available to FHLs will be withdrawn. Instead, FHLs will be eligible for ‘replacement of domestic items relief,’ which is more restrictive and applies to other residential property businesses. Businesses with existing capital allowances pools will be allowed to continue claiming writing-down allowances on that pool, but any new expenditure incurred after the operative date must follow the standard property business rules.
- Chargeable gains reliefs: FHLs will lose access to various reliefs from taxes on chargeable gains, such as roll-over relief and business asset disposal relief. This change could significantly impact the financial planning of FHL owners, particularly those who have relied on these reliefs when selling properties or reinvesting in their businesses.
- Pension relief: FHL income will no longer be considered as relevant UK earnings for calculating maximum pension relief. This change may reduce the pension contributions that can be made by FHL owners without incurring tax charges.
The changes will be phased in starting from April 2025, with specific transitional rules to help FHL owners adjust. For example, existing capital allowances pools can still be used, and losses from FHL businesses can be carried forward and set off against future profits of either the UK or overseas property business.
The upcoming changes to the taxation of furnished holiday lets represent a significant shift in the government’s approach to regulating this sector. By removing tax advantages that have long benefited FHLs, the government aims to promote fairness and align the tax rules for FHLs with those for other property businesses.
Property owners must now prepare for these changes, which will require careful planning and potentially restructuring of their business operations to maintain profitability and compliance.
As the April 2025 deadline approaches, consulting with tax professionals will be crucial for navigating this new landscape.
- Feargal McCormack (feargal.mccormack@aabgroup.com) is managing partner at AAB Group Accountants Limited (www.aabgroup.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.
