What are the Tax Rules for Renting Out a Property for Vacations?

Q: I’m a property owner, and I’m considering renting one of my houses out for people to use for vacations. What are the tax rules I need to understand?

A: It‘s a timely question, and unfortunately for you, there was a change announced in the Budget that will mean you can no longer benefit from a certain type of tax relief in the future.

At the moment, there are tax breaks for second homeowners letting to holiday makers in the shape of the Furnished Holiday Lettings (FHL) regime.

Among the advantages of the scheme is  the fact that property owners can deduct the full amount of finance costs, such as mortgage interest, from FHL income. And when selling the property, business asset disposal relief may be available. That results in a 10% capital gains tax rate applying.

But the FHL scheme is to be disbanded, Jeremy Hunt has revealed. Currently, the tax breaks make it more profitable for second homeowners to let out their properties to holiday makers rather than to residential tenants to rent, raising concerns over the availability of long-term rental housing for local people.

According to HMRC, if you rent properties that qualify as FHLs, you can get the following benefits:

  • you can claim Capital Gains Tax reliefs for traders (Business Asset Rollover Relief, Entrepreneurs‘ Relief, relief for gifts of business assets, and relief for loans to traders)
  • you‘re entitled to plant and machinery capital allowances for items such as furniture, equipment, and fixtures

Furthermore, the profits count as earnings for pension purposes,meaning tax-advantaged pension contributions can be made.

If the change takes effect and is passed into law, the existing rules will be scrapped from April 2025. But you would have one year during which you could benefit from the current scheme. If you‘d like to understand more about the tax implications of property ownership, please get in touch.

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