How to prepare for the end of the FHL scheme

1. Make financial and operational adjustments

The end of the FHL scheme will mean reduced deductions and increased tax liabilities. You might need to budget for higher tax payments and assess how these will affect cash flow and overall profitability.

The removal of benefits such as full loan interest deductions may significantly reduce your net profits, so you should proactively identify cost-saving measures or explore ways to increase revenue from holiday lettings.

“You’ll only receive basic rate tax relief on mortgage payments,” warns Andrew Park, Tax Partner at Price Bailey. “This means you could be taxed on profits that don’t really exist without the actual net funds to pay the tax bill. So you need to work out whether your business is still viable under the new rules.”

2. Re-assess your portfolio

Make sure you consider the upcoming changes when selling any of your properties, because the valuations could be affected by the end of the FHL scheme.

“It’s also important to reconsider your existing portfolio,” advises Andrew. “Without the existing tax benefits, some of your properties might not be sufficiently profitable. You might choose to sell them, or transition them to long-term residential lets, which could provide a more stable income.”

3. Explore alternative financing options

The introduction of a basic-rate cap on loan interest deductions is expected to have the greatest effect on properties with high levels of borrowing.

You could explore refinancing options, in order to secure more favourable terms. Or you might consider paying down your loans to more manageable levels – perhaps with equity released by the sale of less viable properties.

“Incorporation could be an option,” suggests Andrew Park, Tax Investigations Partner at Price Bailey. “Operating through a company will help you retain full relief on finance costs.  However, it would come with other consequences, on which comprehensive advice should be sought.”

4. Use the transitional rules

The Government has introduced transitional provisions to ease the shift. If you have existing assets in capital allowance pools on 5th April 2025, you can continue claiming allowances for them under the existing rules.  So there is still time to go ahead with qualifying expenditure before the cut-off date and enjoy future benefits.

Any historic losses from FHL operations can also still be carried forward and offset against profits from your property business.

5. Check your pension strategy

FHL income will no longer be considered as relevant UK earnings, so the amount you can save into a pension and the amount of tax relief may be reduced.  If you consider your property portfolio to be part of your retirement planning in its own right you might need to reconsider your savings plan given the reduced incomes and reduced scope for capital accumulation that the tax changes will result in.

“Think about how the changes impact your retirement goals,” advises Andrew. “Alternative tax efficient investment options, such as ISAs, can help you diversify your savings strategy.”

6. Simplify your reporting

One of the benefits of the end of the scheme is the simplification of reporting requirements. Income from FHLs will now be treated the same and consolidated with other residential property income, which eliminates the need for separate calculations.

Use this as an opportunity to centralise your financial records. Investing in tax software, for example, can make it easier to adapt to the new requirements and comply with HMRC guidelines.