Furnished holiday lets – ensure you’re prepared for the changes on 6 April 2025.
Author – Mary Tierney ACA CTA, Tax Director.
In the spring budget of March 2024 the (then) government announced that the special tax rules for furnished holiday lets (“FHLs”) were to be abolished. The UK political landscape then changed quickly and so we did not know whethe the new government would proceed with this plan.
On 29 July, the government published draft legislation and an explanatory note to implement this and whilst it is possible that this draft legislation will not be enacted as drafted, it is all we have to go on at present.
Put simply, all that has happened is that the beneficial tax regime for FHLs has been abolished and furnished holiday let income in the future will be taxed in the same way as all property income. The abolition of the FHL rules is not a cessation of a business but merely changes the way in which the property business is taxed. However, nothing is ever that simple.
It is likely we will see certain furnished holiday businesses arguing that they are as a question of fact carrying on a trade to obtain beneficial tax treatment. The difference is not always obvious, compare a small hotel which is generally accepted to be a trade with a business letting a number of holiday cottages which will be treated as rental income. The office of tax simplification suggested a statutory test should be brought in to give clarity on the distinction between property income and trade, but this has not happened. We expect HMRC to oppose any argument that income derived from property is a trade strongly.
One of the big advantages of an FHL over a normal property letting business is that a FHL could obtain more relief for the assets used within the business by way of capital allowances. The apportionment of a significant proportion of outlay on kitchens and bathrooms, for example, will no longer attract allowances and any free-standing items normally classified as plant will fall within the ‘replacement of domestic items’ rules. There was concern that capital allowances could be clawed back on the cessation of the FHL regime. Fortunately, this is not the case and existing entitlements will be retained, however no new allowances may be claimed after 5 April 2025.
On sale of an FHL, in many circumstances the lower capital gains tax rate of 10% could apply on the basis that a FHL qualified for business asset disposal relief (“BADR”). Under the wider BADR rules, a disposal less than three years after the cessation of a trade can still qualify for the beneficial capital gains tax rate. It is as yet unclear whether a disposal within three years of the deemed cessation arising from the abolition of the FHL rules will operate in the same way.
Another important benefit of the FHL regime was the ability to gift a property which qualified as an FHL without crystallising the capital gain on that gift, we call this gift relief. This is one area where the draft legislation has gone further than the original budget announcement.
What we have to consider is what is known as antiforstalling rules. These can apply where there is a disposal of an FHL after 6 March 2024 but where the conveyance of the property does not occur until after 5 April 2025. In these circumstances in order to benefit from any of the capital gains tax reliefs that apply to FHL’s two conditions must be satisfied:
A There was” no purpose of entering into the contract” in order to avoid the abolition of the FHL rules, and
B The parties were not connected persons or the contract was entered into for wholly commercial reasons
Therefore, great care will be required in respect of any contracts which do not complete before 6 April 2025.
Other preferential tax treatments that FHLs could access which are being withdrawn with effect from 6 April 2025 include:
- The counting of profits as net relevant earnings for pension contributions
- the availability of rollover relief when furnished holiday lettings are disposed of and replaced with new business assets
- the deduction of finance costs such as mortgage interest directly from gross income and
- The ability to allocate the income on a jointly owned FHL in a different % than 50/50
Should you require a review of how these changes will effect your tax profile and exposure, please do get in touch.
