Spring Budget 2024 (under the Conservative UK Government) announced the abolition of the Furnished Hotel Lettings (FHL) scheme from April 2025. As we pointed out in an earlier article, Furnished Holiday Lets - an Uncertain Future, no legislation or guidance was produced under the previous UK Government. If you are a landlord that benefits from, say, the Capital Gains Tax incentives for landlords of short-term furnished holiday properties, legislation is something that you may have been expecting. After all, an announcement is one thing, however, it means nothing until there is legislation.
Fast forward to the draft legislation that will be included in the next Finance Bill. This clause will have effect:
- From 06 March 2024 for Capital Gains Tax relief via ‘unconditional contracts’ under the current rules known as the anti-forestalling rule
- From 01 April 2025 for Corporation Tax and for Corporation Tax on chargeable gains, and
- On or after 06 April 2025 for Income Tax and for Capital Gains Tax
These measures will impact landlords if they are operating as businesses.
Our accountants in St Albans are speaking with local clients who have second homes and/or holiday lets to advise them on how to mitigate the changes.
Who is likely to be affected?
Individuals, corporates, and trusts who operate or sell furnished holiday lettings (FHLs) accommodation.
General description of the measures
This measure removes the specific tax treatment and separate reporting requirements for FHLs.
Income and gains from a furnished holiday let (FHL) will then:
- form part of the person’s UK or overseas property business
- be treated in line with all other property income and gains
Background to the measures
The current rules provide beneficial tax treatment for furnished holiday lettings compared to other property businesses in broadly 4 key areas:
- exemption from finance cost restriction rules (which restrict loan interest to the basic rate of Income Tax for other landlords)
- more beneficial capital allowances rules
- access to reliefs from taxes on chargeable gains for trading business assets
- inclusion as relevant UK earnings when calculating maximum pension relief
To qualify as a furnished holiday let, properties:
- must be available for short-term letting to the public for 210 days and actually let for 105 days or more in each tax year
- should not be used as a long-term let of over 31 days for significant periods
The distinction for a furnished holiday let was introduced in 1984 and provided different and more beneficial tax treatment for short-term lettings within the property investment sector.
Detailed proposals
Operative date
The measure will have effect:
- on or after 6 April 2025 for Income Tax and for Capital Gains Tax
- from 1 April 2025 for Corporation Tax and for Corporation Tax on chargeable gains
Current law
The current law on the tax rules for furnished holiday lettings is contained in:
- Part 3 of the Income Tax (Trading and Other Income) Act 2005
- Part 4 of the Corporation Tax Act 2009
- Part 7 (specifically sections 241 and 241A) of the Taxation of Capital Gains Act 1992
- the Capital Allowances Act 2001
Proposed revisions
This change will remove the tax advantages that current furnished holiday let landlords have received over other property businesses in 4 key areas by:
- applying the finance cost restriction rules so that loan interest will be restricted to basic rate for Income Tax
- removing capital allowances rules for new expenditure and allowing replacement of domestic items relief
- withdrawing access to reliefs from taxes on chargeable gains for trading business assets
- no longer including this income within relevant UK earnings when calculating maximum pension relief
After repeal, former furnished holiday let properties will form part of the person’s UK or overseas property business and be subject to the same rules as non-furnished holiday let property businesses.
The following specific transitional rules will apply:
- businesses with FHL properties will no longer be eligible for more beneficial capital allowances treatment but will instead be eligible for ‘replacement of domestic items relief’ in line with other property businesses — where an existing FHL business has an ongoing capital allowances pool of expenditure, they can continue to claim writing-down allowances on that pool — any new expenditure incurred on or after the operative date must be considered under the property business rules
- under current rules a loss generated from a FHL property business can only be carried forward and utilised against future profits of that same FHL business — after the changes, former FHL properties will be part of the person’s UK or overseas property business as appropriate — that property business will then include the amalgamated profits and losses of all the properties in that business
- persons may have losses to carry forward from their FHL business after repeal — losses generated from this FHL business will be permitted to be carried forward and be available for set off against future years’ profits of either the UK or overseas property business as appropriate
- under current rules FHL properties are eligible for roll-over relief, business asset disposal relief, gift relief, relief for loans to traders, and exemptions for disposals by companies with substantial shareholdings — after the changes eligibility for the reliefs will cease — however, where criteria for relief includes conditions that apply in a future year these specific rules will not be disturbed where the FHL conditions are satisfied before repeal
- in relation to business asset disposal relief, where the FHL conditions are satisfied in relation to a business that ceased prior to the commencement date, relief may continue to apply to a disposal that occurs within the normal 3-year period following cessation
- there is also an anti-forestalling rule — this will prevent the obtaining of a tax advantage through the use of unconditional contracts to obtain capital gains relief under the current FHL rules — this rule applies from 6 March 2024
The Explanatory Notes Legislation Explanatory Notes highlight the four changes for property businesses. Landlords should ensure they refer to HMRC’s Property Income Manual for details of the FHL eligibility criteria - or contact your friendly local accountants Visionary Accounts in the heart of St Albans!
- Finance cost restriction rules will be applied so that loan interest will be restricted to the basic rate for Income Tax (20%)
- The Capital Allowances rules will be removed for new expenditure which will become a ‘replacement of domestic items relief’ in line with other property businesses
- Access to reliefs from taxes will be withdrawn on chargeable gains for trading business assets and
- Maximum pension relief will be restricted because the definition of ‘relevant UK earnings’ is amended
The broad concept of the reforms is to ensure the FHL tax advantages are removed so that all income from property is treated the same for tax purposes. The Explanatory Notes refer to this as ‘parity of treatment’.
Of course, transitional rules will be in place and it is worthwhile pointing you again to the Explanatory Notes, especially with regard the anti-forestalling rule that will be backdated to 06 March 2024.
Do you own a holiday let?
Do you need holiday let tax advice?
Speak to our local holiday let tax experts in St Albans for advice tailored to your needs. Our accountants can assist you whether you have just one holiday let or a portfolio of properties in the UK and abroad.