Furnished Holiday Lets (FHLs)

Introduction

Furnished holiday lets (FHLs) refers to the commercial letting of furnished holiday accommodation where certain requirements about days of letting and days of availability are met. If a property is an FHL this has implications for its tax treatment in terms of losses, capital gains tax, capital expenditure and relevant UK earnings for pension relief purposes.

This note sets out a high-level overview of the FHLs regime and its upcoming abolition from 6 April 2025.

Qualifying criteria            

In order to qualify as an FHL, the property must be fully furnished, let on a commercial basis with a view to a profit and meet certain tests with regard to days of availability and occupation. The property must also be situated in the UK or in the European Economic Area (this includes the EU, Iceland, Liechtenstein and Norway). All FHLs in the UK are taxed as a single UK FHL business and all FHLs in other EEA states are taxed as a single EEA FHL business.

To qualify as an FHL, the property must meet the following availability and occupation tests:

1.During the year, the accommodation is available for commercial letting as holiday accommodation to the public generally for at least 210 days.

2. During the year the accommodation is commercially let as holiday accommodation to members of the public for at least 105 days).

3. Lettings that exceed 31 continuous days cannot be more than 155 days during the year.

These criteria are normally tested across the tax year, but in years of commencement and cessation, they may be tested over the first 12 months or final 12 months, respectively. For example, if letting starts on 1 June 2024, the above conditions would normally be tested in the year to 31 May 2025.

If a property has previously qualified as an FHL but the 105 day condition is not met despite the landlord’s best efforts, it may be possible to treat this condition as being met for up to two tax years using a ‘period of grace’ election. If the individual has more than one holiday property, there may also be scope to make an ‘averaging election’ if a property falls short of the 105 day threshold but the average occupation across the relevant properties exceeds it.

Benefits of FHLs

Having a property qualify as an FHL rather than being an ordinary residential let provides the following benefits:

• Finance costs may be deducted in full in arriving at the profits of an FHL.
• Certain CGT reliefs, including business asset disposal relief (BADR) may be available. BADR can allow gains to be taxed at 10% in tax years up to 2024/25 instead of the usual residential property rates (24% for higher rate taxpayers in 2024/25).
• Profits from FHLs count as relevant earnings for pension purposes meaning tax-advantaged pension contributions can be made.
• Where the accruals basis applies, capital allowances can be claimed on items such as furniture and white goods. In ordinary residential lets, relief is only available for expenditure on replacements of such items.
• Where the cash basis applies, capital allowances are not available, but full deductions for capital expenditure on items such as furniture and white goods are normally allowed.

Losses

Losses on FHLs are subject to stricter rules than ordinary let properties. Losses on the UK FHL business can only be set against future profits of the UK FHL business. Similarly, losses on the EEA FHL business can only be set against future profits of the EEA FHL business. Transitional rules will apply on the abolition of the FHL regime (see below).

Joint ownership by spouses

Where a property is in joint legal ownership spouses or civil partners who are living together, but beneficial ownership is unequal, each individual is normally taxed on half of the rental income unless a valid declaration is made to HMRC on a Form 17. This rule does not apply to FHLs. If spouses hold unequal shares of an FHL property, the profits arising before 6 April 2025 are therefore normally split in accordance with actual income entitlement automatically (e.g., if the property is held as a tenancy in common with a 90:10 ratio, FHL profits would normally be split 90:10 without the need to file a Form 17).

Abolition of the FHL regime

At the Spring Budget 2024, the previous Chancellor announced that the special tax rules that currently apply to FHLs will be abolished with effect from 6 April 2025. This policy was retained by the current government who have included measures in the Finance Bill that is currently in progress. In the main, the provisions simply remove the concept of FHLs, causing affected properties to be treated the same way as ordinary residential lets from 6 April 2025, but there are some transitional measures including:

• FHL losses carried forward to 2025/26 will no longer be in a separate pool. They will be merged with the losses of the UK property business or overseas property business (as appropriate) provided the relevant property business continues to be carried on.
• Ordinarily, ceasing to qualify as an FHL normally gives rise to a balancing event for capital allowance purposes, which can result in a tax charge where capital allowances given exceed the actual depreciation to date. Where the individual continues to let their property after 5 April 2025, this rule is suspended. Additionally, capital allowances can continue to apply to qualifying expenditure that was unrelieved as at 5 April 2025. Expenditure incurred after 5 April 2025 will not attract special treatment.
• Some CGT reliefs may still be available after 5 April 2025 where they are linked to the status before the abolition. In particular, BADR can apply for up to three years where the “business” of FHL lettings ceases before 6 April 2025. HMRC have stated that they regard the date of cessation as “the date from which there are no longer any bookings or lettings nor any intention to resume such activity in future”. HMRC have been asked for clarification on this point, as their guidance does not appear to be consistent with the legislation.
• There are anti-forestalling rules to prevent taxpayers from benefiting from the CGT reliefs by entering into unconditional contracts between 6 March 2024 and 5 April 2025 that complete after 5 April 2025. Ordinary commercial sales that were not intended to avoid the effects of the changes can potentially qualify for CGT reliefs, but the claim for relief will need to be accompanied by a statement setting out why the disposal qualifies.

One area that is lacking any transitional measures is the treatment of properties held jointly by spouses. The abolition of the FHL rules from 6 April 2025 will result in a deemed 50:50 split of taxable income applying to former FHLs unless a valid Form 17 is completed on that date. The Form 17 only has effect for income arising from the date of declaration. It cannot be backdated, but the completed form may be filed with HMRC within 60 days of completion. If a property is beneficially owned 90:10, it would therefore be necessary to complete the Form 17 on 6 April 2025 and ensure that HMRC receive it by 5 June 2025 to prevent the 50:50 deeming rule from applying in 2025/26.

It is not possible to file a valid Form 17 if the beneficial interest in income and capital do not correspond. In these cases, it may only be possible to maintain an unequal split of taxable income if changes are made to the legal or beneficial ownership of the property. Professional advice should be sought in these circumstances, as such changes can have other implications.