What's changing with Furnished Holiday Lets?

The government has issued draft legislation to abolish the special tax regime for furnished holiday lettings from 6 April 2025 for individuals and from 1 April 2025 for corporation tax. This is a key development for accountants and tax advisors with clients owning properties currently classed as furnished holiday lettings (FHL).

This article explores tax rules, including the fact you can no longer obtain capital gains relief for trading business assets.

If your accountancy practice deal with clients who have an FHL business, why not join 20:20 Innovation to stay up-to-date? We have a dedicated Property Sector Group as well as membership options.

What is a Furnished Holiday Let?

A Furnished Holiday Let (FHL) is a type of short-term rental accommodation that can generate property income for property owners.

The tax treatment of Furnished Holiday Lettings income is currently different to, and more advantageous than, normal property income (e.g. from a long-term rental property).

To qualify as a Furnished Holiday Let property, it must be available for commercial letting, furnished, and meet specific conditions.

Qualifying conditions

To qualify as a furnished holiday let, the property must be situated in the UK or the European Economic Area and:

• 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; and
• should not be used as a long-term let of over 31 days for significant periods.

If the above availability and occupancy conditions are not met, there are two elections (averaging election and period of grace election) that can be made so that the property qualifies as a furnished holiday let in a particular year.

What's changing?

The proposed legislation will remove the beneficial tax treatment that current furnished holiday let landlords receive over other property businesses. In particular, for furnished holiday let property owners in 2025/26 and onwards:

• The 'finance cost restriction rules' will limit tax relief for finance costs (including loan interest) to the basic rate of income tax.
• Capital expenditure incurred on the property will be relieved (if eligible) utilising 'replacement of domestic items relief' rather than the more generous plant and machinery capital allowances rules.
• Capital gains tax relief for trading business assets will no longer be available.
• Income from furnished holiday letting activity will no longer be considered 'relevant earnings' for the purposes of calculating an individual's maximum tax advantaged pension contributions.

The furnished holiday let property will simply become part of the owner’s UK or overseas property business and be subject to the same rules as residential property businesses.

Capital Gains Tax

Eligibility for capital gains tax (CGT) business asset rollover relief, business asset disposal relief, gift hold over relief, relief for loans to traders, and exemptions for disposals by companies with substantial shareholdings will cease with effect from April 2025.

Are there transitional rules for existing furnished holiday lettings?

Yes.

Capital allowances

If at the end of 2024/25 tax year the furnished holiday lettings business has a capital allowances pool of expenditure, writing-down allowances can continue to be claimed on that pool in 2025/26 and onwards. There will not be a market value balancing adjustment as the FHL property becomes part of the main property business.

As seen above, any new expenditure incurred on or after 1 or 6 April 2025 can only be relieved via the replacement of domestic items relief, if eligible.

Carried forward losses

If at the end of 2024/25 there are carried forward losses in the furnished holiday letting business, these will continue to be carried forward and will be available for set off against future years’ profits of the main property business (UK or overseas as appropriate).

FHLs that ceased prior to 6 April 2025 - Business asset disposal relief

In relation to business asset disposal relief (BADR), where the FHL conditions are satisfied in relation to a business that ceased prior to 6 April 2025, relief may continue to apply to a disposal that occurs within the normal 3-year period following cessation.

Are there anti-forestalling rules?

Yes. There is an anti-forestalling rule that came into effect on 6 March 2024. This prevents opportunity to 'lock-in' the more favourable 2024/25 capital gains tax treatments (including the 10% BADR rate) by entering into a contract on or after 6 March 2024 but before 6 April 2025 and then having an actual date of conveyance or transfer on or after 6 April 2025.

This is subject to two exceptions for which a statement is required to be made with the claim. Those exceptions are:

1. When the contract was entered into wholly for commercial reasons; or
2. The parties to the contract are not connected persons,

and in either case no purpose of the contract was to avoid the less favourable capital gains tax treatment applicable to FHL disposals after 5 April 2025.

The VAT treatment of holiday lettings is unlikely to change when the FHL regime is abolished. Currently, as per the VAT Act 1994 (Schedule 9 Group 1), ‘holiday accommodation’ is standard-rated. For this purpose, ‘holiday accommodation’ is any accommodation in a building, hut, caravan, houseboat or tent that is advertised as suitable for holiday or leisure use. It is irrelevant whether the property qualifies as an FHL property.

If however, as a result of the changes, the property owner switches to providing living accommodation, the supply will become exempt.

Will there be an impact on business rates?

A short term rental property may be rated as a self-catering property and valued for business rates if it meets certain availability and occupancy conditions. The conditions depend on where in the UK the property is situated and Council Tax is payable if the conditions are not met. The tax changes discussed in this article do not affect business rates.

Does this make a difference for inheritance tax?

Not directly. Even if a rental activity qualified as a FHL business for income tax and capital gains tax purposes, the venture has not necessarily qualified for Business Relief (BR) for inheritance tax purposes. As such, the full value of the FHL is usually taken into account when making lifetime transfers or as part of a death estate.

BR can reduce the value of business assets by 50% or 100% for inheritance tax purposes but BR is not due if the business consists wholly or mainly of dealing in securities, stocks and shares, dealing in land or buildings, or making or holding of investments. HMRC will generally view a FHL venture as one of mainly holding investments.

There may however be cases where the level of additional services provided is so high that the activity can be considered as non-investment, and each case needs to be treated on its own facts.

What should accountants be advising FHL owners now?

Communication is key, to keep your FHL owning clients up to date with the planned changes to this tax regime. A number of 20:20 Innovation members are already using our template content to inform their clients of the upcoming changes.

The assumption should be that, from 1 or 6 April 2025, the income tax and capital gains tax advantages currently associated with FHLs will cease. FHL owners will likely value a personalised tax statement of what this will mean for them and how much additional tax they will pay in 2025/26 and onwards.

If your client has finance costs associated with their FHL, this tax statement should show how income tax relief will be limited to 20% in future.

If your client incurs expenditure on domestic items for the property such as:

• Moveable furniture (sofas, tables, bed frames etc);
• Furnishings (curtains, rugs, carpets etc);
• Household appliances (fridges, freezers, washing machines etc); or
• Kitchenware (utensils, crockery, cutlery etc),

then a reminder of or an introduction to the 'replacement of domestic items relief' regime should be given. Emphasis should be placed on the tax relief being dependent on the expenditure being evidenced as a cost of replacing a particular item and it not being an enhancement. This is very different to the capital allowances regime that the client is currently used to.

If your client incurs expenditure on fixtures that become part of the property, including in relation to kitchens, bathrooms and heating systems, then a reminder that the expenditure incurred on maintaining the property (e.g. replacing a bathroom without upgrading it) will be tax deductible as a repair, should be useful.

The change in the capital gains tax (CGT) treatment is likely to be significant for most FHL owners, even if a sale is not currently on the horizon. In the case of an individual, they may be budgeting to pay 10% CGT on a future disposal of the property under the 'business asset disposal relief' regime. This will not be available for disposals after 5 April 2025, with most gains on disposals of residential property instead taxed at 24%, or more, depending on whether CGT rates are raised at the upcoming 30 October 2024 Budget! It would be sensible to make clients aware of the more than doubling in CGT liability, alongside the anti-forestalling rule

Is there any other preparation to be done before April 2025?

Where there is a high level of activity in managing the FHL consideration might be applied to whether the activity constitutes a trade and any adjustments that can be made prior to April 2025 to secure treatment as a trading rather than a property venture. This is however considered unlikely for most FHL owners that do not take a very hands-on and involved approach.

Timing of expenditure might be key. If your client is planning to incur any expenditure on their FHL over the next 24 months, this should be reviewed and considered in light of the current and new regime.

For example, if the client is planning a loft conversion to create an extra bedroom, this will be considered to be an enhancement to the property.

If the expenditure is incurred before 6 April 2025, plant and machinery capital allowances (including the 100% annual investment allowance) may be available on certain components; including upgrades to the central heating system to cover the new room and new furnishings acquired for it.

If the expenditure is incurred on or after 6 April 2025, upgrading the central heating system will be classed as a capital enhancement to the property but with no tax relief given until a later capital disposal. The new furnishings will not be replacements and so no tax relief will be due under the 'replacement of domestic items relief' regime.

As such, if commercially feasible, in scenarios such as this, the client may wish to consider accelerating the project to a date before April 2025.

If not done already, ascertaining legitimate values of the integral features in the property will add value to the capital allowances special rate pool so that writing down allowances can be claimed (at 6% per annum) after the FHL regime is abolished. This should be done prior to April 2025 - a specialist capital allowances surveyor can help to ascertain the values.

If your client is planning a disposal of their FHL, then again timing will be key to obtaining capital gains tax reliefs. If the disposal can take place in 2024/25 (and remember the anti-forestalling rule above) then the amount of CGT due will possibly be lower. This of course depends on whether the individual has remaining BADR lifetime allowance and other factors. Whenever the disposal takes place, CGT is likely to payable within 60 days of the disposal and so cashflow should be carefully considered.

Can 20:20 Innovation help my firm with communicating to and supporting FHL owners?

Absolutely!

20:20 Innovation members all receive a range of CPD webinars, including an upcoming one on 14 October 2024 called 'Furnished Holiday Lets: The End of an Era'. This is being led by subject matter expert and author Carl Bayley and includes a discussion of options available to FHL owners worried about the removal of the tax benefits. There will be plenty of opportunities for Q&A and the webinar is free for 20:20 Innovation members.

20:20 Innovation also runs the Property Sector Group. Members of this Group receive a range of valuable resources to support, develop and grow their property niche. From marketing content and factsheets to send to clients (to including updating them on the FHL changes), to exclusive and small discussion groups with like-minded property tax advisers.

If your accountancy practice deal with clients who have an FHL business, why not join 20:20 Innovation to stay up-to-date? We have a dedicated Property Sector Group as well as membership options.