What farmers need to know about upcoming tax changes for furnished holiday lets

By Heather Bright, Partner and ARA specialist

In recent years, many farmers have turned to agri-tourism as a way to diversify their income and ensure the financial sustainability of their businesses.

Offering furnished holiday lets (FHLs) on their land has provided an additional revenue stream, while also delivering valuable tax benefits that help farmers offset costs and maximise profits.

The favourable tax treatment of FHLs, including access to capital allowances, Rollover Relief, and Business Asset Disposal Relief (BADR), has made them an attractive option for landowners.

However, these tax advantages will be withdrawn from 5 April 2025, a blow to farmers who rely on FHLs as part of their diversified income strategy.

The removal of these benefits will bring FHL tax treatment in line with that of standard residential lets, impacting both profitability and tax planning.

Capital allowances changes

Currently, owners of FHL properties can claim capital allowances on qualifying plant, machinery, and fixtures, including expenditures on kitchens, bathrooms, and integral features.

This has provided a valuable tax benefit, enabling farmers and landowners to offset significant expenses against their profits.

What changes

From 6 April 2025, the ability to claim capital allowances on new purchases will end.

While it will still be possible to claim allowances on qualifying expenditures incurred up to 5 April 2025, beyond that date, the tax treatment will align with that of long-term residential lets.

This means that costs associated with plant and machinery will no longer be deductible, and free-standing items will fall under the less favourable ‘replacement of domestic items’ rules.

For farmers, this means that any large capital investments in holiday accommodation should be made before the April 2025 deadline to maximise the benefit of capital allowances.

Rollover Relief

Rollover Relief currently allows owners of FHL properties to defer capital gains tax (CGT) when they sell a property, provided the proceeds are reinvested into another qualifying asset.

This has been particularly useful for farmers looking to upgrade or expand their holiday accommodation.

What changes

From 6 April 2025, Rollover Relief will no longer apply to FHL properties.

If you plan to sell an FHL and reinvest in a new property, you must do so before this date to qualify for Rollover Relief.

After the cut-off, any deferred gain will be taxed when the new asset is sold, and further Rollover Relief will no longer be an option.

However, gains rolled into assets that are still held at the owner’s death will not be charged to tax, with the asset achieving the usual uplift to probate value.

Business Asset Disposal Relief

Previously, landlords of FHLs could benefit from Business Asset Disposal Relief (BADR) which offers a reduced CGT rate of 10 per cent on the first £1 million of qualifying gains, compared to the usual 24 per cent rate for non-FHL lets.

What changes

BADR will continue to apply to FHL properties sold before 6 April 2025, provided they meet the criteria for classification as an FHL in the two years before the sale.

For farmers looking to sell a holiday let property, it may be advantageous to accelerate plans to sell before the 2025 deadline to take advantage of the 10 per cent CGT rate.

If you cease your FHL business by 5 April 2025, you will still have three years to dispose of properties and claim BADR.

However, if your business continues past this date, the option to claim BADR within three years is lost.

Changes to the deduction of finance costs

Currently, FHL owners can deduct finance costs, such as mortgage interest, directly from gross rental profits, offering tax relief, particularly for higher-rate taxpayers.

What changes

From 6 April 2025, FHL businesses will no longer be able to deduct finance costs from gross profits. Instead, landlords will be subject to the restricted finance cost rules that apply to long-term residential lets, which only allow a 20 per cent tax credit on finance costs.

For example, if a farmer currently deducts £10,000 of mortgage interest from £30,000 of gross rents, they receive £4,500 in tax relief if they are an additional-rate taxpayer. From 2025, this relief would be limited to just £2,000.

This may prompt farmers to review their financing arrangements to minimise the tax impact.

Losses and property letting

Any losses generated from an FHL business before the rule changes can currently be carried forward to offset future profits.

However, with the removal of the FHL designation, these losses will be amalgamated with non-FHL property letting losses after 5 April 2025.

Farmers should ensure that they are making the most of existing loss relief before the deadline, as future treatment of losses will become less favourable.

We are on hand to review your tax position to ensure that any unused losses are properly applied before they are subject to the new rules.

If you would like further advice on how these changes could affect your farming business, get in touch with our tax specialists.