For 40 years, taxpayers have been able to reap the rewards of a beneficial tax regime for furnished holiday lets (FHLs).
The rules have undergone several changes throughout these four decades but have always been favourable compared to a residential property for let – a differential that has only been exacerbated by recent governments’ stances on taxation of residential landlords.
However, all of that is due to come to an end in 2025, as announced in the Spring Budget earlier this year. These changes will affect the operator of the traditional cottage, as well as the more recent rise of the Airbnb.
Whether the second home is let out on a part-time basis, or as part of a vastly diverse property portfolio, these changes are likely to have a significant impact on those taxpayers running these businesses.
Current benefits for FHLs
Before we look at the benefits for FHL landlords, it is worth a quick reminder of who is going to be affected here. To qualify as an FHL for tax purposes, the property must first meet the following conditions:
- it must be furnished (the clue is in the name);
- it must be based in the UK or EEA;
- it must be commercially let with a view to a profit; and
- it must satisfy occupancy requirements: it must be available for letting for at least 210 days in the year; it must be actually let for at least 105 days in the year – continuous lettings of more than 31 days are excluded from the above.
As always, there are a number of clarifications and exceptions to the above, but that should give a reasonable overview of the properties we are considering here.
So now we have identified our qualifying properties, what tax advantages are we getting?
Firstly, there are several differences to how relief is obtained for business expenses compared to a residential letting property.
Loan interest is one of the starker differences, whereby a buy-to-let landlord taking a loan to purchase their property will always be restricted to basic rate tax relief.
This means that, even if they are taxed at the 40 per cent or 45 per cent income tax rate on their property income, their tax relief on the loan interest will always be restricted to 20 per cent.
An FHL landlord, however, will get full relief for their loan interest at their effective rate of tax, meaning double or more of the tax relief for the same expenditure on the same property, just based on how it is used.
Another big difference between the two is the availability of capital allowances. These allowances allow tax relief for expenditure for items used in the business that have an enduring benefit.
For a residential landlord, relief is only available on the replacement of domestic items within the property, so extremely limited. For an FHL landlord, however, they can claim against the fixtures and furnishings within the property.
Not only is this more tax relief on your expenditure, but also means a big boost to tax relief in year one when the property is first furnished, meaning expenditure will be high while the income is yet to start flowing.
FHL income is also treated as relevant earnings when considering pension contributions, whereas residential letting income is not. This therefore provides an added opportunity to shield some of the tax liability not covered by loan interest deductions or capital allowances as above, and diversify the strategy for retirement for these property owners.
