Abolition of Furnished Holiday Lettings (FHL) tax regime – bad news for holiday let owners!

The 2024 Spring Budget announced Furnished Holiday Lettings (FHL) tax rules would be abolished from 6 April 2025 (1 April for companies). The stated aim of the policy was “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”.

The new Government has now moved forward with these proposals and the draft legislation has been published on 29 July 2024.

Ian Pring, Tax Partner and Chartered Tax Adviser at Westcotts reviews what this means for holiday let owners.

FHL changes

Former FHL properties will now form part of a person’s UK or overseas property business. As a result, they will be subject to the same rules as non-FHL property businesses. The 4 key tax areas affected by the changes are:

1. applying the finance cost restriction rules so that loan interest will be restricted to the basic rate for income tax;
2. removing the capital allowances treatment for new expenditure and allowing ‘replacement of domestic items relief’;
3. withdrawing access to reliefs from taxes on chargeable gains for trading business assets; and
4. no longer including this income within relevant UK earnings when calculating maximum pension relief.

Transitional rules

On the change from FHL to the property business rules, the following transitional rules will apply:

Losses

• Currently, a loss generated from an FHL property business can only be carried forward and utilised against future profits of the same FHL business. After the changes, former FHL properties will be part of a person’s UK or overseas property business as appropriate. Furthermore, that property business will then include the amalgamated profits and losses of all the properties in that business.
• Where persons have losses to carry forward from their FHL business after repeal, the losses generated from this FHL will be permitted to be carried forward. They will be available for set off against future years’ profits of either the UK or overseas property, as appropriate.

Capital Allowances

• Businesses with FHL properties will no longer be eligible for the more beneficial capital allowances treatment. Instead, they will 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.

Capital Gains Tax

• Currently, 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 these reliefs will cease. However, where criteria for relief include conditions that apply in a future year, these specific rules will not be disturbed where the FHL conditions are satisfied before repeal.
• Concerning Business Asset Disposal Relief, where the FHL conditions are satisfied in relation to a business that ceased before the commencement date, relief may continue to apply to a disposal that occurs within the normal 3-year period following cessation.
• An anti-forestalling rule applies from 6 March 2024. This will prevent the obtaining of a tax advantage by using an unconditional contract, with connected persons or not on a commercial basis, to obtain capital gains relief under the current FHL rules.

VAT

The draft legislation is silent on VAT. While residential letting income is exempt from VAT, currently FHL income follows the same VAT treatment as hotels and B&Bs. It’s subject to VAT at the standard rate which is currently 20%.

As matters stand, an FHL business with a turnover over £90,000 needs to be VAT registered. All FHL income is then subject to 20% VAT, whether this will continue will hopefully be clarified as legislation progresses.

If you would like to discuss the impact of these changes, please contact your usual Westcotts contact. Alternatively, get in touch with your nearest Westcotts office.