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The furnished holiday lettings (FHL) regime

By the late 1970s, the UK had an established self-catering holiday accommodation industry. This operated alongside hotels, bed and breakfasts, campsites and caravan parks. The UK tax rules had not kept up with these developments, so there was uncertainty around the tax considerations. This led to the initial question whether operating a short-term holiday rental business was a taxable trade or not.

The introduction of the furnished holiday lettings (FHL) regime rules in 1984 aimed to provide clarity. The new legislation did not treat the activity as a trade. However, the income from it was taxed as trading income rather than income from investments. This was important at the time because investment income suffered an additional tax surcharge. There were plans to abolish the FHL rules in April 2009. Instead, the 2011 reform of the rules both amended and added to the 1984 legislation.


FHL tax regime requirements

The FHL treatment applies to self-catering accommodation let on a commercial basis and meeting a minimum level of letting. This could be in the form of a house, cottage, flat, suite of rooms, caravan, or even a yurt, so long as it meets the specific conditions.

The original legislation, introduced in the early 1980s, required:

  • 140 days availability
  • 70 days of actual commercial letting

These rules tightened in 2011/12, increasing the requirements to:

  • 210 days availability
  • 105 days of actual commercial letting

The FHL tax rules are unlikely to apply to second homes as they are typically unable to meet the requirements following the 2011 reforms. Additionally, an occupier of the let cannot stay for more than 155 days of a 12-month period (roughly five months). It does not count any days let to friends or family at reduced rates or lets of more than 31 days as these are not commercial.

Major tax benefits include:
  • Capital allowances can be claimed on FHLs. Capital expenditure includes the purchase of white goods, furnishings and electrics. This often allows 100% relief in the year of expense.
  • Interest incurred on borrowings is fully deductible against taxable profits, which is more generous than the reliefs given to long term let providers. For those letting long-term residential properties, loan interest relief is restricted to the basic rate of income tax.
  • Business asset disposal relief (BADR) – e.g. if an FHL owner wishes to sell their FHL property. BADR reduces the cost of capital gains tax (CGT) payable on the sale of an FHL property to a rate of 10%. Usually, gains upon the sale of a long-term letting property are often subject to a CGT rate of 28%. This rate will drop to 24% from 6 April 2024. Only the first £1 million of an individual’s relevant lifetime capital gains can qualify for business asset disposal relief. The logic for this policy is to incentivize investment by reducing the tax rate on sale. However, it can encourage owners of properties in certain locations to consider letting them as an FHL for two years prior to sale.
  • Roll-over relief – e.g. if an FHL owner wishes to sell their FHL property but purchase another. Roll-over relief allows a deferral of chargeable gains. This is because it counts as a new trading asset, which allows the deferral of gains on other qualifying assets. This relief is important for investment in the industry.
  • Hold-over relief – e.g. if an FHL owner would like to gift the property to a friend or family member. Hold-over relief allows the deferral of chargeable gains that would otherwise arise. This relief is very important for family succession and allows businesses to continue and to be passed on to the next generation.
Minor tax benefits include:
  • Income from a FHL held jointly by a married couple or civil partners is not caught by the default 50:50 split for income tax purposes.
  • Profits from an FHL business are relevant earnings for pension contribution purposes. This means that tax advantaged pension savings are in respect of such profits. Ordinary letting business profits do not qualify for this.
Capital allowances

Capital allowances can be claimed on FHLs. This is very important for investment in the sector. Normal letting rules prohibit claiming tax relief on initial capital expenditure. The normal letting rules encourage unfurnished letting of properties, which is the most common approach in the UK. That is not appropriate for FHLs. Furthermore, in the absence of capital allowances, there would be no basis for tax relief on swimming pools, children’s play areas, etc.

Positive impacts of FHLs
  • FHLs provide key income to the local economy
  • Diversified businesses, such as farms, have come to rely on business from FHLs
  • Brings old property not fit for permanent residence back into use, for example in ancient fishing ports
  • Encourages renting out spare space on larger properties
  • Encourages investment into local economy, which drives quality and activity
  • Encourages second-home owners to let property when vacant


Case studies
1. Properties falling into the hands of second-home owners

A young couple who has lived in Cornwall all their life and wish to remain there.

Employment opportunities are scarce, so they decided to set up a holiday let business together. Using savings from investments, inheritance money and bank loans, they started with one FHL property and aimed to acquire more.

They renovated the properties to a five-star standard. They invested to maximise occupancy, achieving 40+ bookings per year, as well as revenue and profit. This is their sole source of income.

At the time the couple made the investment, they had no intention to sell. The proposed tax changes will result in immediate tax charges, which they cannot afford. They now have the concern that they will either have to increase their prices (not tolerable in the cost-of-living crisis) or have to sell quickly.

If they have to sell, they will consider leaving Cornwall for other employment opportunities. Due to the five-star standard, and level of investment, they think the most likely purchaser who can afford their properties will be retired couples or second-home owners.

2. Properties with planning restrictions need protection

A farmer who has had to diversify due to increased pressures on the farming community.

They invested heavily in renovating multiple dilapidated barns and installed several glamping units. They took out mortgages to fund the renovation costs.

The farmer is now concerned that they will either have to increase their prices (not tolerable in the cost-of-living crisis). They have no ability to rent out the properties to long-term residents due to the planning restrictions.

There is also unlikely to be a demand for long-term rental as they are on a working farm, which tourists find very attractive for short stays, but families do not. This is because of connectivity issues and the disruption of working farms and animals.

The farmer is concerned they may lose their entire farm as they cannot pay back the debt taken out to renovate the barns. There is then a risk here of the sale to a developer, which may result in loss of green belt land.

3. Properties supporting local businesses

A property owner from London who acquired a luxury £2m+ new build property in Cornwall built by local builders.

They purchased this property with a holiday let mortgage of £1.4m. It generates around £200k gross revenue.

The owner wants to maximise revenue when they are not occupying it themselves. The property generate 40+ client bookings and support a team of local cleaners and caretakers. They pay a local agent and management company to oversee their property. They consistently monitor its performance, and they liaise regularly with their management agent.

The agent says they fear properties like this will fall into the hands of second-home owners who will not use their services, which will result in job losses.


In conclusion

Jeremy Hunt announced plans to abolish the FHL regime during the Budget. This followed on from previous press speculation. There was no further detail released on the day other than an anti-forestalling measure designed to prevent abuse of the 10% CGT rate. The policy costings showed that the motivation for the announcement is not to raise tax revenue. The Finance Bill (No. 2) 2024 (FB (No.2) 2024) does not include anything on the matter either.

The current position is very uncertain and is causing consternation and stress to owners of FHLs. This uncertainty is likely to damage investment. It is unclear what the policy objective is, or whether this abolition of the FHL regime is ever likely to be enacted. We understand that amendments could be brought forward to FB (No. 2) 2024, but that would seem an unusual and unhelpful approach and would restrict scope for parliamentary scrutiny. If the measure is not included in FB (No. 2) 2024, then, if it happens, it will not be legislated until after the general election, and probably not until after the proposed abolition date.

We hope that the Government will bring forward a consultation document to communicate with interested parties. This way, decisions are sensible and informed and will not inflict disproportionate damage to the UK tourism industry.

FEATURING: John Endacott
John is the firm’s head of tax. He provides high level tax advice combined with commercial acumen in terms of managing and advising on personal… read more
Tom is a partner in the Truro office of PKF Francis Clark with expertise in the tourism and leisure industries. Tom’s leisure sector clients are… read more
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