There are certain qualifying conditions that need to be met in order for a property to be classed as a FHL. If these are met, landlords that are within the FHL tax regime can potentially benefit from the following:
- Deduct the full cost of their mortgage interest payments from their rental income - Mortgage interest relief is only available at 20% on a normal residential letting.
As a result, for individuals taxed at the higher rates, this will mean they pay more tax from April 2025
- Claim capital allowances on furniture and other equipment - Not being able to claim capital allowances going forward is potentially also going to affect the amount of tax due, as this could lead to higher rental profits moving forward
- Pay a lower rate of capital gains tax (CGT) when selling the property - The sale of a qualifying FHL is currently classed as disposing of a business asset, and as such qualifies for Business Asset Disposal Relief (BADR). This means any capital gain on the sale of the property is taxed at the lower rate of 10%. The 10% rate only applies to the first £1m of value, but by comparison with the rates of CGT on the sale of other residential property of 18% and 24%, this change will result in substantially more CGT being payable.
- Income from FHL qualifies as net relevant earnings for pension payments - Profits from FHL can be used to increase the total amount of pension payments that can be made
- Qualify for rollover relief for CGT - Proceeds can be reinvested in the business assets to defer payment of CGT
All of this is a significant difference by comparison with the taxation of landlords whose property does not qualify as a FHL.
The Spring Budget 2024 has brought the end of the FHL tax regime, effective from April 2025, and there will be further details on this once the draft legislation is published.
This change is the government’s way of putting all landlords on an equal footing, but they also hope it will result in the availability of more long-term rental properties and of sales of FHL properties back into the market.
