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Furnished Holiday Lettings: What You Need to Know in 2024

26 Jun 2024

In his Spring Budget on 6 March 2024, Chancellor Jeremy Hunt announced that the furnished holiday lettings (FHL) regime will be abolished from 6 April 2024. Other than a small section in the Overview of Taxation Legislation and Rates (the OOTLAR) that accompanied the budget statement, no further detail has been published.

The OOTLAR information was:

“As announced at Spring Budget 2024, the government will abolish the Furnished Holiday Lettings tax regime, eliminating the tax advantage for landlords who let out short-term furnished holiday properties over those who let out residential properties to longer-term tenants. This will take effect from April 2025.”

An ’anti-forestalling’ measure was also described as follows:

“Draft legislation will be published in due course and include 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 will apply from 6 March 2024.”

The announcement of the general election on 4 July 2024 added further uncertainty to the government’s plans. One piece of certainty the election gives us is that we will not see any draft legislation until after the election.

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Would a Labour government also look to abolish the FHL regime?

If, come July, we have a change of government, it is unclear whether Labour would seek to abolish these special tax rules.

It is generally thought that Labour would seek to abolish some of the tax advantages available to FHL property owners. Indeed, the tax regime related to FHLs was the subject of a 2022 review by the now defunct Office of Tax Simplification (OTS), in which the value of the regime itself was called into question, so it is reasonable to expect some changes, regardless of who is in government.

Holiday lets by the sea

What are Furnished Holiday Lettings (FHLs)?

Not all holiday rental properties are FHLs. For a property to qualify as an FHL, it must be furnished and situated in the UK or the EEA. The property must also meet set criteria for availability, actual lettings and pattern of occupation.

If the property fails to meet the set criteria for a particular year, there are two elections that can be made to ensure the property qualifies as an FHL for up to two further tax years.

What are the tax benefits for Furnished Holiday Lettings (FHLs)?

The current tax regime contains numerous tax advantages for those who own properties that qualify as an FHL property.

Allowable expenses

Loan or mortgage interest that is incurred for the property is fully deductible in calculating the taxable profits of the furnished holiday let business. Otherwise tax relief on loan and mortgage interest would only be given by way of a basic rate deduction.

This increases the amount of business expenses that can be deducted from FHL income reducing the owner's taxable income.

Claim capital allowances

Capital allowances can be claimed for furniture, fixtures and domestic items that are used in the property. For non-FHLs, the only relief available for such items relates to the replacement of domestic items.

Capital allowances can be a very useful deduction from taxable profits, further reducing the FHL property owner's tax liabilities.

Increase tax-advantaged pension contributions

Rental income from a furnished holiday let is treated as ‘relevant earnings’ for pension contribution purposes. By increasing relevant earnings there is then the possibility for increasing the amount of tax-advantaged pension contributions that can be made.

Pay less capital gains tax

Business Asset Disposal Relief

For capital gains tax purposes, a furnished holiday let is treated as a trading asset and can qualify for the Business Asset Disposal Relief (BADR) rate of 10%. This is a far lower capital gains tax rate than would otherwise apply.

Furnished holiday let

Business Asset Rollover Relief and Gift Holdover Relief

FHLs also qualify as business assets for the purposes of Business Asset Rollover Relief and Gift Holdover Relief.

You can see that the special tax rules that apply to a furnished holiday let give the same tax benefits as those available to trading businesses They also distinguish an FHL property from properties that are held for investment purposes.

These income tax and capital gains tax reliefs are tax considerations that may even affect a person's choice in the property they buy.

What are the implications of abolishing FHL status?

Due to the lack of detail, we cannot be certain of the implications of abolishing the special status of FHLs. If we were to interpret the announcement literally, it would mean that the tax benefits mentioned above would no longer apply to properties that previously qualified as FHLs. The knock on is obviously increased taxable income and increased tax liabilities for the same income.

The 2022 OTS report suggested that if the government were to abolish the FHL regime, a ‘brightline’ test could be introduced to help distinguish between trading and investment properties.

In April 2024, HMRC confirmed to the ICAEW that no such test will be introduced; instead, existing case law would be relied upon to determine the borderline between trading and investment businesses, with a focus on the underlying source of income. This means that the possibility of being classed as a trade for tax purposes, as opposed to a property business, remains very small.

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Would the abolition of FHL status affect the VAT treatment?

Currently, there are no specific VAT rules for FHLs, so the abolition of the special status for FHLs will not affect the VAT treatment of income generated by an FHL. The provision of holiday accommodation is standard-rated for VAT, with the definition of ‘holiday accommodation' for VAT purposes being “any accommodation advertised or held out as suitable for holiday or leisure use”.

It follows that unless the use of the property is changed to domestic accommodation (which is VAT exempt), abolishing the status of FHLs will not affect the property’s VAT treatment.

Would Stamp Duty Land Tax be affected?

It seems unlikely unless there was a change in approach to second home ownership altogether.

Under current tax rules, there is no difference between an FHL property and any other additional residential property purchase as far as Stamp Duty Land Tax is concerned. If you already own a residential property worth more than £40,000, then a 3% surcharge is added to the rate that would otherwise apply.

What is the proposed anti-forestalling rule?

The anti-forestalling rule mentioned in the OOTLAR is intended to “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 is set to apply from 6 April 2024.

It is thought that the anti-forestalling rule will prevent the taxpayer from obtaining BADR when contracts for the sale of an FHL were exchanged after 6 March 2024 but not completed until after 6 April 2025. However, there are concerns that the anti-forestalling rule will effectively prevent BADR from 6 March 2024, and that it could also apply to Rollover Relief and Gift Relief.

Furnished holiday let (FHL)

Are there any potential problems with abolishing FHL status?

Firstly, it is important to consider what happens to the capital allowances pools when a property business ceases to qualify as an FHL: balancing charges or allowances must be calculated, determined by the difference between the market value of the assets and their tax written down value.

In most cases, a balancing charge will arise because, due to the annual investment allowance, the tax written down value of the assets is likely to be £nil. This is concerning for current FHL owners because, without transitional provisions, the abolition of FHL status could give rise to tax charges that are not borne from the receipt of income. It is hoped that transitional provisions for capital allowances will be introduced.

Secondly, the current position for losses incurred by an FHL business means that there are concerns that FHL owners could never be able to claim relief for their losses unless transitional provisions are introduced.

Currently, the losses of an FHL business cannot be offset against any other income, only carried forward and used against future FHL profits. Transitional provisions will be required to ensure that FHL owners are able to use their losses.

How can we plan for the proposed abolition?

For FHL owners and their advisers, losing this favourable tax treatment is far from ideal.

The abolition of FHL status has been announced and we know that there will be an anti-forestalling measure, but that is all we know. No draft legislation for these tax changes has been published though and there has been no indication that transitional provisions have been considered.

The upcoming general election and the possibility of a new government add further uncertainty.

Can 20:20 Innovation help with FHL?

Our webinar ‘Furnished Holiday Lets: the end of an era’ has been rescheduled to take place after the election. It will now run on 14 October 2024 so that our speaker Carl Bayley can cover the implications of the general election result. The webinar will consider the FHL changes ahead and also advise on how to take advantage of the FHL regime while it remains.

If you are an accountant in practice or industry and would like more information about becoming a 20:20 Innovation member, why not book a free 30-minute demo with our team today.

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