Furnished Holiday Lets – abolition of special tax rules

As suspected, it appears that the Labour government plans to proceed with the changes outlined in the last Budget (presented by the Conservative government) regarding wide ranging changes to the taxation of Furnished Holiday Lets (FHLs). While comments can be made by 15 September 2024, it appears that there’ll be no back tracking.

Draft legislation to move forward with these changes was released on 29 July 2024.

What does this mean for FHL owners?

From April 2025, the specific tax treatment and separate reporting requirements for FHLs will be removed.

The policy paper highlights that the key benefits that will be removed include:

Exemption from finance cost restriction rules (which restrict loan interest to a basic rate tax reducer for income tax purposes)
More beneficial capital allowance rules on fixtures and furniture
Access to reliefs from taxes on chargeable gains for trading business assets including gift holdover relief, business asset disposal relief (10% tax rate) and rollover relief
Inclusion as relevant UK earnings for pension purposes

The relevant date the changes will apply from is 6 April 2025 for income tax and capital gains tax and from 1 April 2025 for corporation tax.

Transitional rules

Some specific transitional rules will apply:

Capital allowances – those owning FHL properties will no longer be eligible for beneficial capital allowance treatment but will instead be eligible for replacement of domestic items relief in line with other property letting businesses. However, many feared a crystallisation or clawback of previous allowances or a loss of ongoing relief, but the proposed rules will enable those with a capital allowance pool to continue to claim relief on that pool. This is great news for those who could have suffered from more draconian measures. As expected, however, any new expenditure from the relevant date must be considered under the property business rules.

Losses – FHL properties will then be part of the UK or overseas property business and that business will combine the profits and losses of all the properties in that business. Losses being carried forward will therefore be available to set against future year profits of the property business.

This proposal will provide a welcome relief, and potential benefit, for those with losses being carried forward.

Capital gains (CGT) reliefs – under the current rules FHL properties are eligible for rollover relief, business asset disposal relief (10% tax rate), gift relief, relief for loans to traders and exemptions for disposals by companies with substantial shareholdings. After the changes the eligibility for the reliefs will cease.

There are also anti-forestalling rules. This prevents the obtaining of a tax advantage through the use of unconditional contracts to obtain CGT reliefs by selling or disposing to a connected party, completing after 5 April 2025.

Business Asset Disposal Relief (BADR) is specifically mentioned and, where the FHL conditions are satisfied in relation to a business that ceased prior to the commencement date (1 April/6 April 2025), relief may continue to apply to a property disposal that occurs within the normal three year period following cessation. This means that, in limited circumstances, the advantageous tax rate of 10% could apply to a disposal as late as 5 April 2028.

VAT

The draft legislation doesn’t mention the implications of VAT for short-term letting focussed property letting in the future or for those already registered for VAT. There may be further clarity on this and we’ll share information in due course. For now, however, it should be assumed that the VAT legislation will continue to apply to these activities. While these rules could be a simplification for many, leaving some properties within the VAT registration regime may add a complication not previously anticipated. Advice should be taken on anyone selling a VAT registered activity or indeed deciding to cease short-term letting as there could be consequences of ceasing the VAT registration.

Who will be affected the most?

Those affected are largely unchanged from our post budget review

Higher rate tax payers with high borrowings – a limitation to basic rate tax relief on the interest incurred will lower net returns
New entrants to the market who’ll lose relief on the initial furnishing or those looking to expand a property or expand a portfolio
Married couples, or those in civil partnerships, who’ve benefited from being able to allocate profits flexibly will now return to fixed percentages of either the default of 50:50 or by election the percentage of actual beneficial ownership

Need Help?

If you’d like to discuss this in more detail, please get in touch with your usual Larking Gowen contact. You can find contact details in the Our People section of our website. Alternatively, call 0330 024 0888 or email enquiry@larking-gowen.co.uk.

Chris Scargill and Melanie Howard

A more detailed appraisal of the March Budget announcement relevant to FHLs was covered in our bespoke brochure on this matter. Our updated version and further guidance will be published in due course.