We know it’s tricky to stay on top of all the rules and regulations when it comes to owning and operating a holiday let, but with the recent changes announced in the Spring Budget, it’s more important than ever to ensure you adapt and keep your business running smoothly and profitably.
Whether you’re operating an Airbnb style model where people can rent a house for a night, or a slightly longer minimum term such as a week or two weeks, the rules still apply.
Our blog on compliance has all you need to make sure you’ve checked all the boxes!
But in this article we’re going to take a specific look at what the recent changes are and what they could mean for your business.
So What’s Changed?
In the recent Spring Budget, Chancellor Jeremy Hunt advised that the government would be bringing the furnished holiday lettings scheme (FHL) to an end from 6th April 2025 onwards.
The FHL scheme allows holiday let owners several tax benefits related to the running of their business, e.g. allowing mortgage interest to be deducted as a cost and capital allowances, both which reduce the overall tax you have to pay.
What Qualifies as a Furnished Holiday Let?
A property is classed as a Furnished Holiday Let (FHL) if it’s fully furnished and commercially let out. It also has to be available to let for at least 210 days of the year.
The Rule Change Explained
Fortunately, the scrapping of the FHL scheme doesn’t mean there won’t be any relief or tax credits, however there will be some significant changes.
For example, any finance costs and interest will be limited to the basic rate of relief, which is 20%, and instead of any capital allowances, you will be allowed to claim relief on the replacement of domestic items such as electronics, kitchen items, appliances and white goods as well as flooring and carpets.
Another benefit of the current scheme is allowing business asset relief on the sale of a holiday let, which will no longer apply, resulting in a higher amount of tax to be paid at the point of sale.
As it currently stands, owners selling their holiday lets can claim Business Asset Disposal Relief (BADR), Business Asset Rollover Relief (BARR) or Gift Hold over Relief, depending on the nature of their sale.
As of 6th April 2025, the above reliefs will no longer apply, and business profits will no longer fall under the category of "relevant earnings”.
What the Rules Mean for Your Business
Depending on your individual circumstances, the change in legislation could affect your holiday let business significantly. If we look at the various factors mentioned above, the fact that mortgage interest and financing costs will no longer be deductible from income will mean that all taxpayers will only be eligible for the basic 20% tax credit.
For higher and additional rate taxpayers, full relief will no longer be able to be claimed and instead will be capped at the 20% basic rate, which is is likely to result in a more expensive tax bill.
Capital allowances will no longer be allowed, which means that the purchase of any plant, machinery, appliances, furniture, as well as fixtures and fittings will not be able to be claimed. This will be completely replaced by the RDI scheme.
With the current scheme, when selling a holiday let, it is classed as a business asset and therefore under the BADR scheme, so you only have to pay capital gains tax (CGT) at the rate of 10%. With the FHL scheme coming to an end, it will mean that CGT will be payable at either 18% for a basic rate taxpayer, or 28% for a higher rate taxpayer.
Finally, your profits will no longer be treated as “relevant earnings”. This means that you would no longer benefit from the corresponding tax relief when making your pension contributions.
Although the FHL scheme is coming to an end, if your holiday let is run as a company, you can continue to benefit from deductible mortgage interest and capital allowances, but this also means you need to adhere to the rules of running a limited company such as filing annual company accounts.
Summary
Over the years, the FHL scheme has proven to be very attractive for holiday let owners, and understandably so. From being able to fully deduct mortgage and interest costs, to a lower capital gains tax bill, the scheme has helped landlords immensely.
Running a holiday let as a company is the most effective way to enjoy similar tax benefits that the FHL scheme provides, however this depends on whether it’s the right model for you as a landlord.
For landlords, property legislation is always changing, and the abolishment of this scheme means that holiday let owners who own properties in their own name will have to adjust accordingly, and this may result in profits being affected, especially with several forms of relief and allowances being withdrawn.
Whilst this may affect some holiday let owners in the short term, with the demand for short term accommodation continuing to rise and the fact that, although slightly different to the FHL scheme, there are still forms of relief such as the RDI scheme, and the 20% tax credit allowance being applicable, it is likely that the holiday let business model will only go from strength to strength in the long run.
If short term rental data is anything to go by, there’s no better time than now to find your next profitable short term property, and Airbuy & Sell are always ready to help you achieve your holiday let business goals!
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