Foreign Currency Partners, a provider of currency exchange services, is urging holiday let investors to prepare for significant tax changes coming into effect from 6 April 2025.
The Labour government has announced a tightening of the tax reliefs available to furnished holiday let (FHL) owners, aligning them more closely with those applied to buy-to-let properties. While transitional arrangements will soften the blow for existing investors, the changes are set to impact future investments and property owners should begin planning now to mitigate risks.
The new rules will reduce the income tax relief on finance costs for higher-rate taxpayers and limit the availability of capital allowances, while also curbing Capital Gains Tax (CGT) reliefs for new holiday let businesses. As the industry absorbs this news, Foreign Currency Partners offers essential guidance on how property investors can protect their portfolios, especially for those managing overseas holiday lets and dealing with foreign exchange exposure.
Key tax changes from 6th April 2025
- From April 2025, holiday let owners will see loan interest relief restricted to the basic rate of 20%, matching the rules already in place for long-term rentals. This change will significantly impact higher-rate taxpayers, leading to reduced tax savings on finance costs.
- New capital expenditure on holiday lets will no longer qualify for capital allowances, limiting tax deductions for those seeking to invest in or upgrade their properties. Instead, relief will be limited to replacing domestic items such as furniture.
- Future investors will no longer have access to key business CGT reliefs, such as roll-over relief and business asset disposal relief, making the tax landscape less favourable for new holiday let businesses.
- Income from holiday lets will be excluded from pension relief calculations, affecting the financial planning of property owners relying on these earnings.
Transitional arrangements for existing investors
While the changes present challenges for the holiday let sector, transitional arrangements will provide some comfort for existing investors:
- Current holiday let businesses will retain access to capital allowances on expenditure already incurred, allowing them to maintain tax efficiency on past investments.
- Losses from holiday let operations can still be carried forward and set off against other property rental income, offering some relief for investors managing fluctuating income.
- Existing owners will continue to benefit from key CGT reliefs, including roll-over relief and business asset disposal relief, provided conditions are met. These reliefs will remain available for up to three years following the cessation of a holiday let business, offering flexibility for those considering an exit.
Implications for Holiday Let Investors
While the upcoming changes introduce a more challenging tax environment, the transitional arrangements recognise the commercial nature of many holiday let businesses. Foreign Currency Partners advises property investors, especially those with overseas holdings, to act swiftly in reviewing their financial strategies.
The restriction of finance cost relief to 20% and the loss of capital allowances may reduce profitability for some investors, while the impact of currency fluctuations on foreign transactions could further complicate financial planning. Investors need to be aware of the risks and opportunities associated with cross-border transactions and the potential effects on their tax liabilities.
As tax reliefs tighten, holiday let investors need to adopt a proactive approach to protect their investments. Our goal is to help clients navigate the complexities of managing overseas properties, offering the expert currency management and strategic guidance they need to make informed currency exchange decisions in this evolving tax landscape.
