MONTHLY FOCUS: PLANNING FOR THE END OF THE FHL REGIME

If you let holiday accommodation, you are probably aware that the tax advantages for “furnished holiday lettings” (FHLs) are going to end in April 2025. This Monthly Focus covers all of the transitional rules and explains the tax consequences concisely. It also details a number of planning ideas you can consider using to mitigate the impact on your own position as an FHL landlord.  

INTRODUCTION

The furnished holiday lettings (FHL) regime has been part of the UK tax legislation since 1984, though it has changed a number of times since then. The status recognises that a qualifying FHL business has elements that are akin to a trade, rather than a passive rental business. As such, an FHL business currently enjoys a number of tax breaks that are not available to other residential property businesses. 

From 6 April 2025 for unincorporated FHL businesses owned by individuals or partnerships (including limited liability partnerships) (1 April 2025 for companies), there will be no distinction between FHL lettings and any other residential property letting business. Note. 6 April 2025 (1 April 2025 for companies) is referred to as the “abolition date”. 

We will begin with a reminder of the current rules to contrast with the position that will apply from April 2025. 

The FHL tax breaks currently available: 

• entitlement to capital allowances (CAs) for new items, meaning relief can be obtained for the cost of furnishing a property, not just replacing domestic items 
• exemption from the financing cost restriction for residential letting businesses chargeable to income tax, i.e. where the landlord is an individual, number of individuals or partnership 
• profits are classed as relevant earnings for the purposes of working out your maximum tax-relieved pension contributions 
• profits from FHLs owned by two or more persons can be allocated as the owners see fit – this allows for tax efficiency 
• capital gains tax (CGT) reliefs are available on a sale or transfer of the business and the business assets, namely: 
• business asset disposal relief 
• gift holdover relief for business assets 
• rollover relief for replacing business assets 
• loss relief for irrecoverable loans to traders. 

For 2025/26 there will be no distinction between FHL lettings and any other residential property letting business. The consequences of this are: 

• the rental profits/losses will need to be aggregated with any other UK or overseas (as appropriate) letting business 
• access to the more favourable CAs regime will cease. Relief will only be available for replacement of domestic items 
• income will not be relevant earnings for pension purposes 
• each spouse or civil partner will automatically be taxed on 50% of the income from a property they own jointly. If they own the property in unequal shares they can elect to be taxed on income in proportion to their share 
• access to the CGT reliefs will cease, subject to transitional rules 
• the financing cost restriction will apply. 

Note. Letting of holiday accommodation is always a chargeable supply for VAT purposes and standard-rated where the owner is registered or liable to be registered. However, the sale of the property is VAT exempt.

For more assistance, take a look at our Accounting Services

CAPITAL ALLOWANCES

What’s the current position? 

Landlords of FHL properties can potentially claim tax relief via capital allowances (CAs) for furniture, white goods, equipment, fixtures and fittings and integral features used in a property that qualifies as an FHL. In contrast, this is not available to the landlord of a non-qualifying property business. They can only claim CAs on tools and equipment used in the property business, e.g. gardening equipment or a van. 

Instead, non-FHL landlords can claim relief for replacing moveable domestic items (replacement of domestic items relief). However, this relief only covers replacement items, not the first-time expenditure. The relief may also be restricted where the replacement is not broadly of the same quality or standard as the item being replaced. There is no similar restriction with CAs, so FHL landlords can improve the quality of the items in their properties, potentially increasing the rental income, and claim relief in full. 

Example – replacement of domestic items – non FHL landlord 

Your property’s existing fridge is a basic model which cost £199 in 2005. An equivalent replacement would cost £250 in 2016. However, you go for a swish American-style fridge freezer costing £999. The tax allowance you can claim is £250. The additional expenditure of £749 can’t be claimed as it relates to an improvement of the item and not the like-for-like cost. However, if, say, in ten years’ time, you replace the American-style fridge freezer, with an equivalent costing £1,300, the full amount of that expenditure will qualify for the allowance. 

FHL landlords who use the cash basis can’t claim CAs, other than in respect for cars used in the business. 

Generally, FHL landlords who have claimed CAs are likely to have utilised the annual investment allowance (AIA) of £1m per year. The AIA allows the landlord to claim CAs for 100% of the cost of equipment etc. for the tax year in which it’s purchased.

What are the transitional rules?

The big worry was that the abolition of the FHL status would mean that balancing adjustments would be required for any FHL which owned equipment etc. on which it had claimed or could have claimed CAs. Balancing adjustments are taxable or tax deductible depending on whether they are positive or negative and can be required where either: 

• equipment is sold; or 
• the business ceases (the abolition of FHL status could be considered as cessation of the business). 

In the latter case the balancing adjustment is equal to the difference between the market value of the equipment etc., i.e. the amount that the items would expect to sell for to an unconnected third party, and its cost for CAs purposes minus any CAs claimed. 

The imposition of balancing adjustments would have meant each item of equipment etc. in an FHL would need to have been valued at 5 April 2025.  

Fortunately, the draft legislation includes a clause that means the amended rules will not be treated as permanently discontinuing a business from the abolition date (1 or 6 April as appropriate), which means: 

• any unrelieved balance in any CA pool will continue to attract WDAs; and 
• no balancing adjustment will apply at the abolition date. 

This will only apply to capital expenditure incurred on or before the abolition (1 April for FHLs liable to corporation tax and 6 April for those liable to income tax).  

While the policy note that accompanies the draft legislation doesn’t go into detail, it appears that post-abolition sales or transfers of FHL properties that have been subject to CA claims will be treated in the same way as they would be currently. It is any new expenditure that will need to be examined, and relief under the replacement of domestic items rules (where applicable) claimed. 

Example 

Stevie has an FHL business. In 2022/23 she purchased some upmarket furnishings costing £15,000; this was added to the existing pool of expenditure on which Stevie can claim CAs. This made the total pool of expenditure £25,000. Stevie claims £15,000 CAs using the AIA and writing down CAs of £1,800 (£10,000 x 18%) on the remaining £10,000. This leaves £8,200 in the CAs as pooled expenditure. Stevie sells the furnishings on which she claimed the AIA for £5,000 in 2026. Assuming no other purchases or sales of items qualifying for CAs were made, the sale reduces the pool of expenditure on which WDAs can be claimed to £3,200 (£8,200 – £5,000). 

Stevie would then be able to claim for any replacement furniture of a broadly similar standard, assuming she was replacing the items. If she only had basic items of furniture to replace, the amount she could claim would be restricted, as discussed above. 

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UNRELIEVED LOSSES

What’s the current position? 

Landlords of FHL properties must use losses arising against future profits from the same FHL business. This means that losses from a UK FHL business cannot offset profits from an EEA FHL business, or vice versa. The relief cannot be offset sideways against general income, nor can it be carried back against profits from a previous year. This is restrictive, and although the rules are similar for non-FHL property losses, the two cannot be mixed.  

So, in theory, you could have up to four sets of losses to keep tabs on, i.e. for a UK FHL business, an EEA FHL business, a UK property business and an overseas property business. 

What are the transitional rules?

From the date of abolition any earlier losses that arose from UK and EEA rental businesses categorised as FHLs that have not been used against profits are carried forward. The losses from UK and EEA FHLs must be recorded separately as losses from one cannot be used to set against losses of the other. 

Usually, where an FHL business ceases any unused losses simply die with the business. There are no special rules for terminal losses like there are with trades. Without transitional provisions, relief would be lost for good. 

The government has protected against this by a provision that will permit any FHL losses that arose prior to the abolition date to be treated as brought forward losses of a non-FHL property business. As mentioned, UK losses can only be used against UK property business profits, and likewise EEA losses can only be used against EEA property business profits. 

One result of this is that FHL losses that have been realised or increased due to capital allowance claims will be able to reduce profits on non-FHL property income in the right circumstances. 

Example 

On 5 April 2025 Ash has unused FHL losses of £25,000. He also has two long-term let properties which collectively enjoy approximately £10,000 profit each year. Ash will be able to reduce the profits using the losses attributable to CAs on items that would not have been relievable in a non-FHL business. 

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CGT RELIEFS

What do FHLs currently qualify for? 

FHLs currently qualify for the following CGT reliefs, subject to the underlying conditions being met: 

• business asset disposal relief (BADR) 
• holdover relief for gifts of business assets 
• rollover relief for replacement of business assets; and 
• loss relief for irrecoverable loans made to traders. 

Let’s recap on these reliefs in the context of FHL properties. 

BADR 

BADR can reduce the tax rate that applies to gains to just 10% compared with either 18% where the individual’s income and gains don’t exceed the basic rate threshold, or 24% where they do. The BADR rate of CGT is subject to a lifetime cap of £1m of gains. 

FHLs qualify for BADR where the whole or part of the holiday rental business is sold or transferred resulting in a capital gain.  

Some commentators suggest that BADR might in some circumstances not apply to gains made from the sale or transfer of one or more properties if you continue to own other FHLs after the sale or transfer. For example, where you own four FHL properties and you make a gain from selling one of them. The argument against BADR applying is that the legislation says it can only apply to gains from the sale of part or the whole of a business and not to gains made from the sale of assets that are merely used in the business. Therefore, the sale of one property out of several is just the sale of an asset and BADR cannot apply to any gain. However, this argument has little or no merit and HMRC’s guidance seems to concur, see here.  

The key test of whether part of a business has been sold or transferred or just assets of the business is whether the purchaser could operate a separate business with what they have purchased. HMRC’s guidance says: 

“Someone may own two shops in different towns and sell one of them but continue with the other. Whether or not this amounts to the disposal of the whole or part of the business depends on the facts. The trader may be able to show that entirely separate businesses, connected only by common ownership, were conducted from each shop. Another possibility is that the activities of each shop, whilst contributing to a single business, form a separate, distinct and clearly identifiable part of the trade. A further possibility may be that the shops are identical in nature but the disposal was of a complete business capable of continued operation whilst the retained business also continued without break. 

For example, one shop may have been an outlet dealing exclusively with wholesale customers whilst the other was used only for retail purposes. Whether there are one or two separate businesses is a question of fact…” 

Quite clearly a single FHL property can be operated and usually will be operated as a separate business in its own right. In fact, s.241 Taxation of Chargeable Gains Act 1992 states that “any UK property business which consists of, or so far as it consists of, the commercial letting of furnished holiday accommodation shall be treated as a trade…” and thus a single FHL is a trade in its own right and thus a business for the purpose of BADR.  

While a change of ownership of an FHL will inevitably mean a change in administration of the rental business, this is not a factor in deciding if there has been a sale or transfer of part of a business as opposed to just a sale of assets.   

It’s difficult if not impossible to think of a situation where an FHL property could be sold and not be operated as a separate business. Any argument from HMRC to suggest otherwise should be refuted and its own guidance (see above) quoted to counter the suggestion.  

BADR can still apply to a gain resulting from the sale or transfer of an FHL business after it has ceased. If all other conditions for BADR are met it can apply where the gain from a sale or transfer occurs not later than three years after the cessation.  

Example  

On 31 October 2023 your let property ceased to qualify as an FHL property because you began letting it for long-term occupation. This means your FHL business ceased on 31 October 2023. Business assets that are sold or transferred no later than three years of an individual ceasing their business count as a material disposal for BADR. In this example you have until 30 October 2026 in which to sell or transfer the FHL property and qualify for BADR.  

Failure to meet the FHL conditions will be a deemed cessation for these purposes, unless a claim for averaging or a period of grace is made. 

BADR applies to the whole gain, including periods when the property did not meet the qualifying conditions for an FHL, as long as the conditions are met at the time of sale. 

Example 

Terry and Julie purchased a property jointly for £250,000 which they let for holiday accommodation. They occasionally occupied the property for family holidays. It took some time to build the business and consequently in the first two tax years it did not meet the conditions for FHL status. Over the next five years the property qualified as an FHL for four, including the final two years of ownership. Terry and Julie sold the property a few months after the end of the 2024 holiday season for £330,000. The whole £80,000 gain qualified for BADR. 

FHLs owned by companies 

BADR is potentially available in respect of gains made from the sale or transfer of shares in a company that was a trading company. It therefore can apply to shares in a company which owns properties qualifying as FHLs. To qualify for BADR: 

• the company must be your personal company (broadly, a company in which you own 5% or more of its ordinary share capital); and 
• at the time of sale or transfer of the shares you were an officer or employee of the company or a company in the same group. 

The conditions must be met for at least two years ending with the date of sale or transfer of your shares. Remember that the date of sale or transfer is that when an unconditional contract for the sale or transfer is agreed.   

BADR is available on shares in such a company where the trade ceases, as long as the disposal takes place within three years of that cessation. 

Holdover relief 

Holdover relief (also known as gift relief) allows individuals and others to defer the taxation of capital gains that arises when they gift certain types of asset. Instead of the transferor being taxed on the gain, the value of the gift for CGT purposes is reduced by the amount of gain and the reduced value is the deemed cost of the asset to the recipient.  

Example  

John gifted a FHL property to his adult son. It cost John £100,000 and its value when gifted was £175,000. John is deemed to have sold the property for this amount thereby making a gain of £75,000. John and his son make a joint gift relief election to hold over the gain. This means John’s son is deemed to have acquired the property at the cost of £100,000 and not £175,000. 

Gift relief elections must be made jointly by the transferor and transferee. 

Non-business assets can qualify for holdover relief under a separate provision if the gift is immediately chargeable to inheritance tax (IHT), but this can’t apply to gifts from one individual to another which are “potentially exempt” for IHT purposes. 

The amount of gain which can be held over may be restricted by: 

• any form of payment made by the transferee to the transferor for the asset 
• periods of non-business use of an asset; or 
• the assets being shares in the transferor’s company in circumstances where the market value of the company’s chargeable assets is different to the market value of the chargeable business assets.

Rollover relief

Where a gain arises on the disposal of an asset which has been used for the purposes of a trade, it may be possible to defer the point at which the gain becomes chargeable by rolling over the gain into the base cost of a replacement asset. 

The effect is to reduce the allowable expenditure on the replacement asset, thus increasing the gain which arises on its ultimate disposal. 

To be eligible for this relief: 

• both the original and replacement assets must be qualifying assets; and 
• the replacement asset must be acquired within a set period. 

There is no requirement for the disposal to be by way of sale, nor is there a requirement for any disposal proceeds to be in the form of cash. This means that, for example, gifts of assets, or disposals in exchange for shares, may also qualify for relief. 

A crucial point with rollover relief is that there is no requirement for the old and new assets to be of the same type (but see below regarding non-UK residents). 

Where the qualifying asset is a disposal of an interest in UK land, and the claimant is a non-UK resident, the replacement asset must also be an interest in UK land. 

To qualify for relief in full, the disposal proceeds of the original asset (net of any costs of disposal) must be fully reinvested in a replacement asset (net of any costs of acquisition). If the proceeds are only partially reinvested, the relief is restricted. 

FHL properties currently qualify as they are assets used for a qualifying activity (specifically a trade). The full list of qualifying activities that must apply to both the old and new asset is shown below. The asset must be used for the purposes of: 

1. a trade (including FHLs and the management of woodlands on a commercial basis) carried on by either: 

• the taxpayer; or 
• their personal company (e.g. a building owned by a shareholder and used by the company for the purposes of its trade) 

2. a profession, office or employment 
3. a not-for-profit unincorporated association chargeable to corporation tax (or a company owned by it) 
4. a not-for-profit professional or trade organisation 
5. share farming; or 
6. discharging the responsibilities of a public authority. 

Where the replacement asset is a “depreciating asset”, i.e. one with an expected useful lifetime of less than 60 years, the deferral is temporary. The gain is not rolled over into the base cost of the new asset, it is just the payment date of the CGT that is deferred. The CGT is payable ten years after the replacement date (or the date the depreciating asset is disposed of, or ceases to be used for a qualifying activity, if earlier), although it’s possible to dispose of the depreciating asset and claim rollover relief again before the ten-year point. This is often used to “park” gains where there is no immediate need for a long-term replacement asset.  

A key point with rollover relief is that you need to consider the historic use of the asset as far back as 31 March 1982, and split the gain into qualifying and non-qualifying portions. For example, if an FHL property only met the conditions for seven out of a total of ten years of ownership, it would be reasonable to restrict only 70% of the gain as qualifying for relief. Similarly, any mixed use of the asset should be considered. 

The new asset must be acquired during a qualifying period that: 

• starts one year before the disposal of the original asset; and 
• finishes three years after the disposal of the original asset. 

The new asset must be used immediately after acquisition for a qualifying activity (see above). 

HMRC has the power to extend the replacement window in limited circumstances, e.g. where the intention to acquire a replacement asset existed and can be evidenced, but circumstances beyond the individual’s control prevented an acquisition taking place before the time limit expired. 

A claim cannot be made until a replacement asset is actually acquired. However, it’s possible to make a provisional declaration of intention to claim relief before a replacement asset is acquired. This declaration must be made on the self-assessment return for the tax year in which the disposal occurs, and the CGT liability for the year can be calculated on the basis that the gain is to be rolled over. 

However, if a suitable replacement asset is not purchased within the time limit, the claim is invalid and the tax will be payable with interest, calculated as though no claim had been made. 

Spouses and civil partners are treated as separate persons for rollover relief purposes. Consequently, a gain may be rolled over into a new asset acquired from a spouse or civil partner. 

A number of concessions extend relief in other specific circumstances: 

Situation	Concession
Disposal proceeds from the old asset are used to enhance the value of other assets, provided these assets are used in a trade (or will be so used once the enhancement is completed)	ESC D22
Disposal proceeds from the old asset are used to acquire a further interest in an existing asset already used in the trade, e.g. extending an existing lease. However, relief will be denied if a tenant acquires the freehold interest in land, immediately selling part of it off, for example, to finance the original purchase. Any capital gain on the sale cannot be rolled over into the original purchase as HMRC takes the view that the acquisition was not expenditure on a new asset	ESC D25
The asset is not brought into immediate use because work of a capital nature is to be carried out on it (provided that it is brought into use once this work is completed)	ESC D24
The asset is sold and then reacquired for purely commercial reasons. Relief is specifically denied if a tenant acquires the freehold interest in land and immediately sells off part of it (for example, to finance the original purchase). HMRC takes the view that the acquisition does not constitute expenditure on a new asset	ESC D16

What are the transitional rules?

The draft legislation contains provisions to remove FHLs from all the CGT reliefs. The only specific transitional rule is in respect of BADR, where relief can apply to disposals made within three years of the cessation of a business. So, it will be possible to claim relief on a disposal of a previously qualifying FHL property.  

It’s not currently clear whether the repeal date will constitute a deemed cessation for these purposes, or whether a landlord will need to cease letting the property or properties altogether before 6 April 2025. The draft legislation is silent on this, though the relevant clause specifies that relief can still apply under the “assets used for the purposes of a business” rules if the date the business ceases to be carried on is before 6 April 2025. Our opinion is that there will need to be an actual cessation of the business ahead of 6 April, or there would be no need for a specific rule to preserve BADR entitlement. 

The policy note also contains the following statement: 

“Under current rules FHL properties are eligible for roll-over relief, business asset disposal relief, gift relief, relief for loans to traders, and exemptions for disposals by companies with substantial shareholdings – after the changes eligibility for the reliefs will cease – however, where criteria for relief includes conditions that apply in a future year these specific rules will not be disturbed where the FHL conditions are satisfied before repeal.” 

It is not apparent that any of the reliefs listed have criteria which apply in a future year for individuals. The requirement for the asset being transferred to be a qualifying business asset, i.e. used for the purposes of a qualifying trade, is tested at the time of the transfer for holdover and rollover relief. There is no requirement that the asset continues to be a business asset. For rollover relief, the replacement asset must be immediately brought into business use (with exceptions for assets requiring enhancement), but again this is tested at the transfer date. 

Relief for irrecoverable loans to traders is dependent upon the loaned funds being used for the purposes of a qualifying trade, so it may be that the clause above would cover a situation where a loan was made prior to 6 April 2025, but the funds have not been fully used by that date. If so, it seems odd that a specific clause hasn’t been included in the draft legislation – as there has been for BADR and sales following a cessation. Doubtless, things will become clearer after 15 September 2024 (the date that commenting on the draft legislation closes). 

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PLANNING AHEAD

Gift properties to children to use as a home 

The purpose of this strategy is to make use of CGT private residence relief (PRR). This in effect exempts from tax gains made by an individual from the sale or transfer, e.g. by gifting, of a property which they occupied as their only or main residence.  

If you have adult children, you may wish to help them get onto the property ladder. The abolition of the FHL status could be an ideal time to do this by making a gift of a qualifying property to them. Whilst this could be done with a property they subsequently continue to let, there could be a tax advantage if they wish to reside in the property as their only or main home. 

Generally, where an asset, in this case a property, is gifted to another person (an individual or a company) it counts as if it had been sold at its market value. If this exceeds the cost of the asset for CGT purposes, the difference is a taxable gain.  

Example 

Nicko makes a gift of a house to his son Steve. The house was purchased many years ago for £80,000 including associated expenses, and is currently worth £250,000. Nicko will realise a gain of £170,000. The CGT bill could be as high as £40,800 depending on whether Nicko is a higher rate taxpayer, and if there is any available annual CGT exemption. 

Nicko has received no physical payment for the property, but the CGT is payable nonetheless. Steve pays nothing, but will be treated as having acquired the property for £250,000. 

To avoid this situation, it’s possible to make the gift into a discretionary trust instead. A gift to a trust is a chargeable lifetime transfer (CLT) rather than a potentially exempt transfer (PET). This means that the transfer is immediately chargeable to inheritance tax, although if the value of the transfer is less than the available nil-rate band the charge will be at 0%. As a result, holdover relief can be jointly claimed under s.260 Taxation of Chargeable Gains Act (TCGA) 1992. Typically, the property will be transferred from the trust to the beneficiary at a later date, with a further holdover claim made. 

This solves the CGT charge problem, but there’s a snag. Where a property has previously been subject to a s.260 holdover claim, PRR cannot then be claimed. So, generally it’s advisable not to use this strategy for a gift of a property where there is any possibility the recipient will use it as a home later on. 

Alternatively, the gift of an FHL property offers a way to use holdover relief more directly. As an FHL property is a “business asset” you can make a gift directly to your adult child (there’s no need to use the trust route) and claim holdover relief under s.165 TCGA 1992 instead of using s.260 relief.

Not only does this save on administration and costs of setting up a trust, but crucially unlike s.260 holdover relief, there is no rule that prevents PRR being claimed on a property that has been subject to an s.165 holdover claim. 

A gift must take place in a tax year that the property qualifies as an FHL or it won’t be a business asset and holdover relief cannot apply. So, it’s essential that you ensure a property meets the FHL conditions, whether outright or by using a period of grace or averaging election for 2024/25, and that the gift is made before the end of the tax year. 

Example 

Let’s suppose the property Nicko chooses to gift to Steve has always been an FHL. The values etc. are the same as before, and they jointly claim holdover relief under s.165 – so Steve’s base cost for CGT purposes is £80,000. Steve lives in the property for ten years, eventually selling it for £350,000. His gain of £270,000 will be fully covered by PRR and so CGT free. 

If the property had been transferred to Steve via a trust and s.260 relief claimed, the entire gain would be chargeable to CGT when the property was sold. It’s possible to revoke the s.260 election but the CGT on the original transfer by Nicko would then be payable, and Steve’s PRR would only cover the gain since he took ownership, i.e. £100,000. 

In our example, we assumed that the property is Steve’s only home. If he has more than one home, he can make an election to maximise relief. In this example, the gain exempted includes the capital growth before Steve acquired the property. However, if Steve had another property and only used the former FHL as a home on weekends, HMRC could argue that it isn’t his main home so no PRR would be due.  

A main residence election solves this problem, as there’s no requirement that the home subject to the nomination is the one that is occupied most of the time. It merely needs to be genuinely occupied as a home some of the time.  

There is only a two-year window following a “change in the combination of residences” to nominate the main home. Use our document to make the election. 

Properties owned jointly by married couples and civil partners 

If you intend to continue the letting business after 5 April 2025, the rules that apply to non-qualifying property businesses will automatically apply. Among these is a rule that will affect you if you let jointly owned property, and the other joint owner is your spouse or civil partner. It’s a misconception that where assets are jointly held, you each own 50%. In practice, it is likely that you have a “joint tenancy” (sometimes called an undivided share). That is to say you each share ownership of the whole asset rather than a specific proportion of its value.  

The tax legislation days that income from jointly held investment assets owned by a married couple or civil partners is taxable on a 50:50 basis. This rule applies to income derived from most types of jointly owned assets such as interest from bank accounts, shares and, of course, rental properties. On the face of it, this is reasonable, but it is not necessarily tax efficient. For example, if you are a basic rate taxpayer, and your spouse is an additional rate taxpayer, it would be more beneficial to divert rental profits to you to prevent a 45% tax charge applying. This is not possible under a joint tenancy. 

As an FHL is a trade you can split profits unequally by a simple agreement. This will cease after the rules are repealed, so you will revert to a 50:50 split. 

The good news is that where a 50:50 share of income is not tax efficient, spouses and civil partners can change this by varying ownership of an asset to unequal shares and be taxed according to their respective shares of the property. This will require the joint tenancy to be “severed”.  

You can sever a joint tenancy and replace it with ownership as tenants in common. Under this arrangement while the property is still jointly owned, each owner is entitled to a specific share of the property, e.g. 70:30. Any income derived can be, but is not automatically, taxed on each person in proportion to their ownership share of the property. 

You can sever a joint tenancy and replace it with ownership as tenants in common yourself, but unless you are experienced in the legal aspects of property transactions, for example dealing with the Land Registry, it is best to ask a solicitor to help.  

Even after changing ownership shares in a property so they are unequal, say 80:20. you must still pay tax on the profits from your property rental business as if you owned it 50:50. In order to be taxed on your share of the income according to your ownership share (often referred to as beneficial interest) you must submit an election signed by each spouse or civil partner asking HMRC to tax you according to your respective beneficial interest. 

The election must be made using HMRC’s Form 17 (see here) or a document that exactly replicates it. Before making the election it’s important to read the notes that accompany the form. 

Alternative method for sharing income from jointly owned properties 

There’s an easier way to work around joint tenancy ownership of a property by spouses and civil partners so that income can be taxed other than a 50:50 basis. The spouse or partner who wishes to reduce their share of the income can maintain the legal ownership, i.e. the title, of the property, but give away part of the underlying beneficial interest. This is achieved using a simple trust known as a bare trust. The trust specifies that the legal owner holds all or part of their share of the property for the benefit of their spouse or civil partner as a nominee. A husband and wife who jointly own the property can therefore sign a declaration of trust in respect of the beneficial ownership. This is sufficient to displace the default 50:50 position for income tax purposes. 

Whichever of the two methods is used for changing beneficial interests in a property it is effective for all tax purposes not just for income tax. Therefore, it’s possible to make a second or subsequent change in beneficial interests in a property prior to the sale or transfer of a property to improve CGT efficiency. 

Example 

Mary and Jane are civil partners. They owned a rental property as joint tenant for several years before severing the tenancy and replacing it with ownership as tenants in common owning the property 75% and 25% by Mary and Jane respectively. They now intend to sell the property during which they expect to make a substantial capital gain. For CGT purposes it would be more tax efficient for Mary to own 60% of the property and Jane 40%. Before contracts for the sale are signed a bare trust is created, the terms of which are that Mary holds 15% of the property on trust for Jane. This reduces Mary’s share to the required 60% and Jane’s to 40%.  

Unmarried joint owners 

Changing ownership of a property to save income tax is not necessary if the owners are not married or in a civil partner. The owners are entitled to decide each year how much of the total income from the property they are each entitled to and thus how much they are taxed on. HMRC confirms this in its property income manual (see here). 

Maximising relief for capital expenditure 

Continuation of capital allowances for pre-April 2025 expenditure 

As discussed earlier, any unrelieved capital expenditure on plant and machinery (equipment such as furniture, freestanding white goods) acquired before 1 April/6 April 2025 (when FHL status is abolished) will continue to qualify for CAs (writing down allowances) after the change until a CA deduction has been given for the whole of the expenditure. 

For equipment acquired on or after 1/6 April 2025 which replaces existing equipment and is for use by the tenant in the let property, tax relief will be allowed under the rules for replacement of domestic items. However, items of equipment which aren’t replacements will not qualify for tax relief until they are themselves replaced. For this reason there is an incentive to purchase equipment prior to 1/6 April 2025 so that the expenditure qualifies for CAs. 

Expenditure on fixtures, e.g. light fittings, heating systems etc., depending on their nature, are likely to count as repairs to the property and so will be deductible as a revenue expense from 1/6 April 2025.  

If you make the improvements that are used in your FHL business prior to 6 April 2025 (1 April 2025 for companies), you will be entitled to CAs, including the annual investment allowance (which allows you CAs for the whole of the expenditure for the tax year of in which it’s incurred, i.e. 2024/25). 

Newly acquired rental properties 

If you have, or will purchase, a property that is not yet furnished and you are intending to let it as holiday accommodation, you are going to need to spend some money to kit it out. Under the replacement of domestic items relief rules, you can’t claim for the initial cost of furnishing the property – only the cost of replacing existing furnishings. However, there are a couple of simple tactics you can use to get around this.  

The obvious one is to purchase everything ahead of the change and claim capital allowances. But what if you are unable to raise the funds to obtain the quality of items you want? 

You could buy second-hand items initially to keep the costs down, or even use items from other properties that are currently not needed. You would then be able to claim relief when you relace these after 6 April 2025, as long as the new items are of a broadly similar standard and function. 

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Rearranging finances to mitigate financing cost restriction 

A sudden reduction in relief for financing costs, particularly mortgage interest, might seem (at first glance) to be a strong incentive to increase capital payments. However, remember that some relief will still be due. We looked at how relief for financing costs is given for property businesses generally in Section 61; the relief is restricted to a tax reducer at the basic rate of 20%, rather than making a direct deduction against income. 

The change might provide you with a good opportunity to evaluate and rearrange your finances to increase the relief you can offset against your tax bill. This could be highly relevant if you have other debts and scope to refinance your FHL properties. 

Example 

Dave owns a small FHL portfolio, with an estimated market value of £800,000 and annual profits of £60,000 over the last few years. The outstanding mortgages on these properties is around £150,000, and the annual interest at 4% comes to £6,000 at the moment. Dave also has the following debts: 

Bank loan – £58,000 

Overdraft – £5,000 

Credit cards – £25,000 

Vehicle finance – £30,000 

So, his total other debt is £118,000. The average interest rate on these debts is much higher than the mortgage rate, and Dave estimates that around £15,000 in interest will be paid this year.  

As Dave has headroom in terms equity in his properties, he could seek to release some of this by remortgaging. Let’s say he agrees to release £120,000 and the lender agrees that this will also be at 4%, which will be used to pay off the debts and cover the arrangement fee. His financing costs will be £10,800, i.e. £6,000 plus £120,000 at 4%. As his profits are significantly higher than this, he will be able to claim 20% of £10,800 = £2,160 against his tax bill.  

This is a double win for Dave: 

• he has cut his interest payments by over £10,000 each year; and 
• he has increased his tax relief by nearly £1,000 a year (though this may decrease as time goes on, depending on how the repayments are structured).  

This has all been achieved by a simple rearrangement of where the debt is. Dave doesn’t owe any extra money overall. 

Note that the additional interest on the remortgage qualifies for relief as it is an extraction of the capital tied up in the business. HMRC’s guidance confirms this at BIM45700: 

“This chapter applies for Income Tax purposes to the computation of trade profits and property income. References in the text to a ‘business’ should therefore be taken to include both trades and property businesses. The chapter does not apply for Corporation Tax purposes, where there are separate rules in the loan relationships legislation (see CFM30000). 

S34 Income Tax (Trading and Other Income) Act 2005 

A proprietor of a business may withdraw the profits of the business and the capital they have introduced to the business, even though substitute funding then has to be provided by interest bearing loans. The interest payable on the loans is an allowable deduction. This is on the basis that the purpose of the additional borrowing is to provide working capital for the business. There will, though, be an interest restriction if the proprietor’s capital account becomes overdrawn, see BIM45705 onwards.” 

As secured loans tend to have lower interest rates than unsecured ones, this is always worth reviewing, however the potential reduction in tax relief from April 2025 will make it an ideal opportunity to take stock of things. 

In contrast, buy-to-let mortgages tend to be more expensive than buy-to-live ones. So, if you are considering remortgaging a let property to pay down the debt on (say) your own home, make sure the additional tax relief will at least compensate for any increase in interest, and don’t forget that you will probably incur early repayment fees too – look at the bigger picture, not just the tax part. 

Other business activities and rollover relief 

If the changes have dampened your appetite for operating a letting business, but you still want to be self-employed in some form or already have another business, rollover relief may interest you. As discussed previously, rollover relief applies where an asset used in a trade, including an FHL, is sold and a replacement asset is purchased within the permitted window. There are two particular points about rollover relief that make it a very powerful relief for a change of trade: 

1. The old asset and replacement asset do not have to be the same type. 
2. And the assets do not need to be used in the same trade. 

The crux is that to be able to roll over the gain on your FHL properties, you will need to sell them before 6 April 2025. You will then have three years to purchase replacement assets to rollover the gain into. But you can still make a provisional claim for rollover relief to avoid needing to pay the CGT in the meantime.  

Example 1 

Bruce is an FHL landlord, but has always wanted to run a recording studio. He decides to sell his three FHL properties, and does so in February 2025 for £780,000. As the assets were always used in a qualifying FHL business, he can potentially rollover his gain of £250,000 in full. Bruce buys a mobile unit to install in the grounds of his home and fits out the studio with recording equipment, instruments, etc. over the next 18 months, at a total cost of £850,000. Relief will be available in full, and the base cost of the studio and equipment will be £850,000 – £250,000 = £600,000. 

Note that in the example full relief is available because the amount spent on replacement assets exceeded the disposal proceeds for the three properties. If this isn’t the case, partial relief may be available, but you will need to compare the proceeds that aren’t used on replacement assets to the gain. If the leftover amount is less than the gain, partial relief will be available. If the unused amount exceeds the gain, no relief will be available. 

Example 2 

The facts are as before, but this time we’ll assume Bruce only incurs costs of £600,000 on the new studio and equipment. £180,000 of the proceeds have not been used to purchase replacement assets, but this is less than the gain of £250,000. The £180,000 is chargeable in 2024/25, and £70,000 rollover relief can be claimed. This reduces the base cost of the studio etc. to £530,000. 

Had the cost of the new assets been less than £530,000, no relief would be available. 

One point to note is that rollover relief could lead to a loss of BADR if the new assets cease to be used in a business, or the trade ceases and the assets are not sold within three years. There is no continuation of BADR on the old assets following the rollover, as it only affects the base cost of the new assets. 

If you think this trap might apply, perhaps if the business you are intending to start, or already have started, is relatively niche and you’re worried there may be no market for your assets, or you believe BADR may be scrapped altogether in the future, you could consider simply paying the CGT at 10% to secure BADR.  

Paying the tax at 10% may be acceptable if you aren’t reinvesting the full proceeds, like in the second Bruce example. There, Bruce would pay tax of £25,000 (assuming no annual exempt amount available and no previous disposals using BADR), and still have £155,000 in cash after setting up the studio. 

Note. If your other business ceases, the rolled-over gain doesn’t become chargeable. That only happens when the replacement assets are sold.  

Remember, you will need to check the historic use, private occupation and letting of the FHL properties. If they have not always been qualifying FHLs you will need to apportion the gain between qualifying and non-qualifying parts on a fair and reasonable basis. 

Using a company to manage property  

Because from April 2025 your FHL business will be treated the same way as general residential letting businesses there can be advantages to forming a property management company (PMC) to manage it. This doesn’t involve the company owning the properties so there are none of the tricky associated tax issues to worry about.  

The purpose of a PMC is to act as a letting agent for your properties and provide the usual services associated with one, such as organising and arranging maintenance, repairs and property inspections, inventories, contracts, etc. The company can charge you a fee for the services it provides. 

As management fees are deductible when calculating your taxable rental profits for income tax purposes, by using the PMC you are effectively diverting some of the profits into the more favourable CT regime. This sound good but before forming a PMC consider whether the potential tax savings are sufficient to justify the extra admin and cost.  

Example 

Belinda is an additional rate taxpayer by reason of her employment income, and owns ten rental properties, yielding a gross annual rent of £80,000. After expenses are deducted the net profit for 2023/24 was £55,000, and this level is likely to continue. The tax charge on the rental income was therefore £24,750 – meaning her after-tax cash in pocket was just £30,250, representing 38.7% of the gross receipts. This cash is needed to support the family’s needs, and so Belinda has dismissed the possibility of using a company to hold and let the properties. But she has the idea of using a PMC. 

A typical letting agent will charge between 8% and 15% of the gross receipts, so there should be no problem charging a fee in this range. 

Let’s assume Belinda decides on 14% – or £11,200 at the current levels. The company will pay 19% CT on this, i.e. £2,128. However, Belinda will save tax at 45% – £5,040. An overall saving of just under £3,000. Additional running costs of the PMC will be deductible, for example accountants’ fees in preparing the accounts. 

If Belinda was only a basic rate taxpayer, there would be no point in the PMC as the saving would be insignificant. 

Example 

Now that the PMC is up and running, Belinda has £9,072 in the company. If we assume the other expenses of the property business remain the same, i.e. £25,000, Belinda’s taxable profit drops to £43,800. After tax, this leaves her with £24,090. 

As she needed just over £30,000 previously, she will need to extract some of the profit to leave herself no worse off in cash than she was previously. 

She can access up to £500 tax free as a dividend in 2024/25 because of the dividend allowance (we assume it is available in full). To make up the shortfall of £5,500, she would need another dividend of £9,068 – this would give her £5,500 after accounting for additional tax at 39.35%. The cash left in the company would be notional. 

The overall saving here is relatively modest because of the double tax charge incurred on the dividend Belinda needed to extract. However, if the net profits increased, perhaps after acquiring a new property, there would be money capable of being retained in the company, providing a far more material saving. 

Example 

Let’s suppose the turnover was £100,000 instead of £80,000, and the other expenses remain the same. Now, Belinda would pay £45,000 on these profits with no PMC. If she set up the PMC the position changes. The fee charged by the company would be £14,000 reducing the net property profits for Belinda to £61,000 – saving her £6,300, but attracting CT of £2,660. Net saving so far = £3,640. However, as she will have net rental cash after tax of £33,550, she does not need to take a dividend out of the company, though it is worth taking £500 to utilise the dividend allowance. This means there will be £10,840 in cash left in the company, and there has been an overall tax saving of £3,640. On the assumption this continues in subsequent years, the savings and company cash will accumulate every year.  

This type of arrangement is ideal if you want to bring family members in as shareholders as you can then use profit extraction planning to take advantage of various allowances and tax bands. For example, if you have an adult child at university and not working, they have a tax-free personal allowance of £12,570 to utilise. You could divert profits to them to help pay for fees, which in turn could save them incurring increasingly expensive student loans. 

The company could also be used as a retirement pot, building up any post-CT profits that are not immediately needed until retirement. The company could then be liquidated later on, and the accumulated cash extracted as a capital transaction qualifying for BADR. This is available as the PMC is a trading venture, i.e. it is providing management services rather than carrying on the more passive activity of property letting – this remains with you personally. 

Example 

Belinda sets up the PMC and continues for 15 years before retirement. Ignoring any interest the company might receive, there is 15 x £10,840 = £162,600 in the company. If the company is liquidated, which will incur fees (let’s assume £5,000), the CGT charge will be around £16,000. Belinda will retain over £140,000. Had she not set up the PMC, she would be approximately £55,000 worse off due to not enjoying the annual tax saving. 

Selling to obtain BADR 

You may decide that the loss of FHL tax advantages is the last straw and it is time to cash in your chips and walk away. Does this mean you need to rush to sell your properties before 6 April 2025 to ensure you minimise your CGT bill, potentially losing out on a better selling price? 

Thankfully, the answer to this is “no”, provided that certain conditions are met. Where a trade ceases, assets sold within three years can still attract relief.  

The key point here is that you need to ensure the FHL business ceases before 6 April 2025. The fact that the activity will no longer be treated as a trade will not constitute a cessation. 

You can ensure the cessation of your FHL business by permanently making it unavailable to rent from a date earlier than 6 April 2025. You could also choose not to make an averaging or period of grace election for 2024/25, but this will move the cessation date back to 5 April 2024, shortening the three-year window you have to sell the properties in (to 5 April 2027). 

Relief for continuing businesses post-April 2025 

Although the tax reliefs associated with FHLs end in April 2025 that doesn’t mean there are not tax planning opportunities if you continue to let properties. 

We’ve already looked at using a property management company, but in the long term the properties will be sold, transferred as a gift or form part of your death estate. If you sell them you will pay tax on gains that exceed any reliefs or exemptions you are entitled to. Currently, gains on personally owned residential property are charged at 18% to the extent that in the tax year in question your income plus capital gains are no more than the basic rate band. Gains falling above the basic rate band are charged at 24%. 

However, if you’re looking to make gifts of the properties in your lifetime, you could use the alternative form of holdover relief (under s.260 TCGA 1992) at some point to avoid a so-called dry tax charge, i.e. a tax liability for a capital gain where the transferor receives no money for the asset being transferred. 

S.260 allows a joint election (by the donor and the trustees) to be made to defer the CGT charge, as long as the trust is not “settlor interested”, i.e. the donor does not retain a beneficial interest in the assets transferred. The assets can then be transferred out to the beneficiaries outright later on, with a further election under s.260. It is advisable for this to happen within ten years in order to avoid any periodic charges. This is possible as a transfer into a trust is a chargeable lifetime transfer (CLT) rather than a potentially exempt transfer (PET). 

The settlement into a trust is a CLT for inheritance tax (IHT) purposes. This means IHT will be payable (at 20%) to the extent that the value of the transfer when added to other transfers by the same person within the seven previous years exceeds the IHT nil-rate band (NRB).  

Married couples and civil partners are entitled to an NRB each. Each spouse/partner can make use of their NRB by making settlements to the trust. For maximum tax efficiency they should make the transfer to separate trusts. 

One drawback with an s.260 claim is that it prevents a claim for CGT private residence relief on the same property by beneficiaries of the trust should they occupy the property and it’s sold by the trustees of the trust. If you use the trust route to pass on property, it is sensible to warn the beneficiaries, e.g. your children, that they would not be entitled to relief if they were to live in the property. 

You should also advise the beneficiaries that if the property is transferred to them from the trust and they sell it, any capital gain would be calculated using a reduced base cost because of the held over gain.  

Warning! By using s.260 you will reduce your available NRB immediately. This could affect your IHT exposure for 14 years. This is because any failed PETs, i.e. those where you die within seven years of making them, are taxed as if they were chargeable at the time they were made. Failed PETs are taxed ahead of everything else in the death estate, so can be affected by CLTs made up to seven years beforehand. 

Example 

Paul gave his son Eddie a rental property worth £275,000 in May 2017 and died in April 2024. The gift was a PET but became chargeable to IHT because Gerry died within seven years. £275,000 of his NRB would be used to cover the PET leaving just £50,000 (£325,000 less £275,000) to offset against the rest of his estate. This is bad enough, especially as taper relief won’t be available, but there is worse to come for Eddie. 

Six years and 364 days before Paul gave the house to Eddie, he made a gift of £50,000 to a discretionary trust for his niece, Charlotte; this counted as a CLT. Because it was within the seven years prior to the PET, when Paul died it had to be included in the IHT calculation: £50,000 CLT plus the PET of £275,000. Total gifts chargeable to IHT: £325,000. This means that Paul’s NRB is completely used up. It’s a good result for HMRC as it has effectively taxed a gift made nearly 14 years before Paul died. 

Good timing is vital to avoid tax complications. If Paul had waited just another two days before giving the house to Eddie, the CLT made to Charlotte would have been more than seven years before the PET and could have been ignored. This would have given them all peace of mind. If you’ve already made a CLT, avoid making a PET within the next seven years wherever possible. 

As part of your IHT planning, aim to make PETs before CLTs. Had Paul made the gifts in reverse order, i.e. the house first and the trust transfer next, the PET would have completely escaped IHT. 

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