Under the old rules, FHLs were seen as short-term lets, so qualified for rate reliefs under trade purposes. Owners could also claim capital allowances on furniture and rates were beneficial for inheritance tax purposes.

However, the UK government has announced the abolition of the FHL tax regime on April 6, 2025, for income tax purposes, and on April 1, 2025, for corporation tax purposes.

Paislei Godley, associate director at Prime Accountants Group, which has offices in Solihull, Birmingham and Coventry, said the changes would have a significant impact.

She said: “The Government will see this change as a way of making things fairer, by making rates more aligned with residential lets.

“They will have considered the situation in popular holiday destinations such as Cornwall, and see it as a way of deterring people from snapping up holiday homes in areas of the UK where people may be less able to afford to buy their own homes.

“It’s a win-win for HMRC, because it has the dual effect of making FHLs less appealing, while also making landlords consider turning those properties they already own into long-term lets.”

Paislei has crunched the numbers on the change and said the increase would be around £1,400 per year, based on a higher rate taxpayer generating gross rents of £25,000 on their property and paying expenses of £8,700.

Based on expenses of mortgage interest (£5,000); new furniture (£1,000); repairs (£600), cleaning (£600) and management fees (£1,500), the owner would generate a taxable profit of £16,750 and paid £6,700 in tax under the old regime.

However, using the same scenario following the abolition of the FHL rules, the same taxpayer would now be liable to a tax bill of £8,100.

Paislei has outlined the key changes which FHL owners will need to consider from April:

• Capital Allowances on new expenditures can no longer be claimed. Owners will have to revert to domestic items relief for replacing items such as washing machines and furniture
• Finance Costs – individual landlords can still obtain relief for finance and mortgage interest costs, but only at the basic rate of income tax (20 per cent) – the same as other landlords. Before they could claim loan interest as a full deduction, meaning they would benefit at their highest tax rate
• Losses incurred on a FHL can be carried forward and offset against future profits from the same property business, whether in the UK or overseas. After the abolition, losses will now be aggregated with all other UK rental properties and offset against the first available profits
• Capital Gains Tax (CGT) – The option to defer CGT on gains by reinvesting in new business assets has been abolished. In addition, the lower tax rate for Business Asset Disposal Relief (BADR) will no longer apply, so the standard CGT rate for residential properties will be applicable on any future disposals
• Pension contributions and National Insurance – FHL income will no longer count as relevant UK earnings for calculating maximum tax relief on personal pension contributions and for Class 2 and voluntary Class 3 National Insurance contributions

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