Holiday let owners are bracing themselves for the impact of an end to the Furnished Holiday Lettings (FHL) tax regime, which has been brought in by the Chancellor to 'level up' the differences between traditional and short-let holiday rental properties.

Next April, interest for businesses operated by individuals will cease to be a deduction from rental income and relief will instead be given as a 20% tax credit from their tax liability, explains accountancy firm BDO. For higher rate taxpayers, this will mean a reduction in tax relief for interest to the 20% rate.

As trading assets, capital gains by individuals can currently qualify for business asset disposal relief, when gains up to the lifetime limit of £1 million are taxed at 10%. Next year, these gains will be subject to the CGT tax rate of 18% for profits within the standard rate band or 24% for profits within the higher rate band.

Business asset rollover relief, meaning that a gain made on the sale of an FHL property can be deferred if the proceeds are reinvested in another qualifying asset (another FHL property or trading premises), will also be removed.

Withdrawn

Expenditure on qualifying assets for a furnished holiday letting business are currently eligible for capital allowances. This will be withdrawn, although it is likely that businesses might instead be able to claim a deduction from profits for the cost of replacing domestic items.

Gift hold-over relief, allowing a gain made on gifting an FHL property to be held over, will also no longer be available from next year.

Paul Falvey, tax partner at BDO, says while owners of furnished holiday lettings are set to lose some significant tax benefits, those who choose to sell their property after 6th April will be able to benefit from the reduction in the higher rate of CGT for residential property gains, which is due to drop from 28% to 24%.

“The chancellor is clearly hoping that this will lead to significant numbers of property owners putting their holiday homes on the market in the 2024/25 tax year,” he adds.