After 40 years of being part of the tax landscape, Labour have decided to push ahead and begin drafting legislation to replace the Furnished Holiday Lettings Regime. In previous articles written by members of our team, we predicted that Labour would target assets as the main method of boosting tax collection. This prediction was largely because most of the UK’s wealth was tided up in assets owned by the wealthy members of our society.

In what can be dubbed the ‘first step’ towards this taxation policy, Labour has decided to target the Furnished Holiday Lettings Regime. UK taxpayers who operate under this regime will be losing significant tax relief which has been part of their business strategy.

This article details the changes to the Furnished Holiday Lettings (FHL) regime, its implications on tax reliefs, particularly Business Asset Disposal Relief (BADR), and why you might need to consider selling your properties now rather than later.

Context of the Furnished Holiday Lettings Regime

The Furnished Holiday Lettings Regime was introduced into the UK tax landscape around 40 years ago. The purpose of this new addition into our tax system was to support tourism in the UK. The concept was simple, offer landlords tax incentives to operate a holiday accommodation property.

The regime made it attractive for property investors to enter the holiday lettings market, providing some key tax benefits over operating a standard rental property, such as capital allowances, Business Asset Disposal Relief (BADR), and advantageous treatment of losses.

Key Changes to Furnished Holiday Lettings Regime in the Draft Legislation

Finance Cost Restriction

From April 2025, the proposed draft legislation will now restrict the relief available on loan interest to the basic rate of income tax (currently 20%). This means landlords will now only be able to deduct interest at the basic rate, reducing the tax relief available on loans.

This change has an obvious impact, landlords in a higher tax bracket will pay more tax. This will increase the tax burden and push landlords towards a change in operation strategy.

Removal of Capital Allowances Rules

Capital allowances for new expenditures will also be removed. Instead, landlords will only be entitled to tax relief for the replacement of domestic items. This completely alters how landlords can claim deductions.

The removal of capital allowances will impact property investments and tax calculations. Landlords will need to reassess their investment strategies and financial planning to accommodate these changes.

Impact on Business Asset Disposal Relief (BADR)

The eligibility for Business Asset Disposal Relief (BADR) will cease. BADR, formerly Entrepreneurs’ Relief, has a massive impact on the tax savings for property owners.

When a landlord typically sells a second property, they pay tax on gains at 18% and 28%. The benefit of BADR is that landlords would only pay Capital Gains Tax at 10% on gains up to £1M. Then 20% on any gains over that figure.

This loss of this relief will result in all property gains being taxed on the standard 18% and 28% only. Given the impending change to BADR, selling properties now rather than holding them, may be more beneficial for tax relief.

Anti-Forestalling Rule

This term isn’t known to everyone. Anti-forestalling refers to measures implemented by our government to prevent taxpayers from taking advantage of impending changes in tax legislation.

The anti-forestalling rule will prevent property owners from locking in the current, more favourable tax treatments through unconditional contracts. The rule will not apply, if the contract was entered into wholly for commercial reasons, or if the parties to the contract are not connected persons and the contract was not intended to avoid capital gains amendments.

Furnished Holiday Lettings Tax Planning

These changes reinforce the need for consistent reviews of your tax position. In the context of property holdings, its important to review whether selling your properties now whilst BADR is still in play, outweighs holding them for further appreciation and selling at nearly 3 times the tax rate.  

The changes to the furnished holiday lettings regime mark a significant change in the property tax landscape. Highlighting the changes to come over the next few years.

Given the impact of these changes, it is crucial to act promptly. Review your position and map out the best course of action for your situation. As always, we are here to help. Reach out today if you need independent support.