In the latest episode of The Tax Track podcast, ICAEW experts discuss how the government’s plans to abolish the furnished holiday let regime will change how income tax relief is given for interest, increasing the tax liabilities for many property owners.
The government has published draft legislation that removes the tax advantages for furnished holiday lets (FHL)s from 1 April 2025 for companies and 6 April 2025 for individuals.
A key advantage for individuals is the ability to deduct qualifying interest in calculating the taxable profit from the FHL. This currently saves income tax at the individual’s marginal rate, for example, at 40% for a non-Scottish taxpayer paying tax at the higher rate.
For 2025/26 onwards, the taxpayer will need to apply the finance cost restriction. This means that the interest cannot be deducted in calculating the taxable profit from the property business. Instead, a tax credit is given at the basic rate of income tax (20%).
This could increase tax liabilities as:
- less tax relief is given for the interest. This will affect property owners who pay tax on their property business income at a rate of more than 20%; and
- the person’s taxable income is increased. This is relevant to all property owners and it could push them into a higher tax bracket (as shown in the example below), and have other implications (for example, creating or increasing a liability under the high income child benefit charge).
Example
Jill has a property that currently qualifies as an FHL. Each year she receives rent of £18,000 net of expenses and incurs interest on the mortgage to buy the property of £12,000. She has employment income of £40,000.
For 2024/25, Jill may deduct the interest charge in calculating her taxable profit from the FHL. However, in 2025/26, she cannot do this and instead tax relief is given as a tax reduction at the basic rate. This increases her taxable income, pushing her into the higher rate band.
As a result, Jill’s tax bill in respect of her FHL/property business increases from £1,200 for 2024/25 to £2,746 for 2025/26.
Although the government’s plans are yet to become law, and so may change, ICAEW is urging property owners and their advisers to consider how the changes may apply to them so that they can plan for future tax bills.
Listen to the podcast to learn more. This includes the other tax advantages currently enjoyed by FHLs that will be removed from April 2025, potentially resulting in higher tax bills on annual profits and on the sale of the property.
Further information
- TAXguide 08/24: Payrolling of benefits-in-kind and expenses webinar Q&As
- TAXguide 07/24: Tax treatment of travel costs for directors of VC portfolio companies
- TAXguide 06/24: Taxation of cars, vans and fuel Q&As
- TAXguide 05/24: Payroll and reward update webinar Q&As
- TAXguide 04/24: The cash basis for trades: Q&As
