The change of government cast doubt on whether the scrapping of furnished holiday letting (FHL) tax breaks would go ahead. New draft legislation confirms that it will. Transitional rules will allow landlords of FHLs to continue claiming capital allowances for qualifying costs incurred on or before 5 April 2025. Capital gains tax breaks will be allowed if conditions are met as at 5 April 2025.
In March 2024 the government announced that the long-standing tax breaks for landlords who let furnished holiday accommodation would come to an end on 5 April 2025. However, it was clear that because of the nature of the tax breaks a clean break wouldn’t be possible; therefore transitional rules were needed. These have now been published by HMRC.
The main changes that landlords of furnished holiday lets (FHLs) will see are:
• tax relief for loan interest and other finance costs relating to their FHLs will follow the general rules for rental properties and so be capped at the basic income tax rate (20%)
• expenditure on equipment, fixtures and fittings used in the FHL business will cease to qualify for capital allowances (CAs) (HMRC’s relief for depreciation of assets); and
• business asset disposal relief (BADR) and other capital gains tax breaks will end.
CAs transitional rules. FHL landlords who incurred or will incur expenditure on or before 5 April 2025 on equipment and other assets that qualify for CAs, will be entitled to CAs beyond 5 April 2025. There will be no clawback of CAs or deemed sale of the assets as was feared.
A tip to maximise CAs by bringing forward qualifying expenditure you intended to make after 5 April 2025 to an earlier date.
CGT transitional rules. For BADR, where the FHL conditions are met on or before 5 April 2025, relief will continue to apply to a sale or transfer of the FHL property that occurs within three years following cessation of the letting business, whenever that occurs.