Furnished holiday lets tax regime abolished – Budget 2024

In the Spring Budget 2024, the Government has announced that it will abolish the furnished holiday lettings (FHL) tax regime. The intention of this is to remove the current tax advantage for landlords who let short term furnished holiday properties over those who let out residential properties to longer term tenants. This will have a significant impact on those operating holiday let businesses and hit particularly hard on those operating furnished holiday lets as part of a significant business operation.

Office of Tax Simplification recommendations

In November 2022, the Office of Tax Simplification (OTS) produced a report summarising some options for reforming the taxation of let property regime for individuals. This included recommendations for changing or potentially abolishing the special FHL rules.

The OTS recommended the Government consider whether there is continuing benefit to the UK in having a separate tax regime for furnished holiday lettings. The OTS commented that if a decision was made to abolish the beneficial tax rules then the Government should consider whether it would be appropriate to introduce a statutory ‘brightline’ test which may allow certain tax benefits to a property business which meets a certain level of trading/activity.

What are the key tax benefits currently available to FHL owners?

• Interest incurred on borrowings is fully deductible against taxable profits
• Beneficial capital allowances rules allowing tax relief for fixtures
• Various capital gains tax reliefs, including potential for business asset disposal relief (10% rate on sale), rollover relief and gifts hold-over relief
• Profits from FHLs can be treated as relevant earnings for pension purposes
• 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

Impact of abolishing FHL regime

Whilst we are awaiting draft legislation to confirm the implementation of this change, our understanding of the key impacts of today’s announcements is as follows:

Business asset disposal relief (BADR) is currently available on the disposal of some FHL qualifying properties as the disposal of all or part of a business. This means that a gain on the sale of qualifying property can be taxed at a lower rate of 10% rather than the residential rates, which are often paid at 28% (providing that the gain is covered by the taxpayer’s lifetime BADR limit, which is currently set at £1 million). The residential capital gains tax (CGT) rate is due to fall to 24% from 28% from 6 April 2024 for higher rate taxpayers. BADR will no longer be available after the abolition of the FHL regime, leading to CGT payable at a higher tax rate from 6 April 2025.

In addition to this, business asset rollover relief, which means that a gain made on the sale of an FHL property can be deferred if the proceeds are reinvested in another qualifying asset (which could have been another FHL property or trading premises) will also be removed from 6 April 2025.

Gift hold-over relief, allowing a gain made on gifting an FHL property to be held over will also no longer be available from 6 April 2025. Currently a property which has been used as qualifying FHL throughout ownership can be gifted (e.g. to a family member) with no CGT payable. Care should be taken where the property does not qualify throughout ownership as tax could become payable on a gift of the property. Stamp duty land tax (SDLT) should also be considered where the property is mortgaged.

Capital allowances are given to FHLs owners for fixtures (e.g. fitted kitchens, sanitaryware, heating, plumbing, electrical and lighting) as well as furniture within the property. This often allows 100% relief in the year of expense. When the FHL rules are abolished how will previously claimed allowances be treated? Will there be a clawback of some of the relief claimed, will any charge be spread or will there be transitional rules?

Points to consider

Today’s announcements contained no mention of a consultation so there are concerns about the impact of the withdrawal of the regime to a number of FHL owners.

The OTS report outlined a suggested ‘brightline’ test to provide tax reliefs where property letting activities subject to income tax would qualify as a trade. This report proposed possible factors to be considered within the test are:

• Minimum number of properties let
• Letting is on a short term basis
• No personal use of the let
• Level of personal time devoted to the property letting and services provided

Our article in Taxation magazine outlined some key recommendations from this OTS report. Today there was no consultation announced, which leads to concerns that those operating FHLs as a substantial business will be harshly impacted compared to other trading businesses such as hotels from April 2025.

Anyone owning FHL property may wish to consider the options open to them before the FHL rules are abolished in April 2025. This may include a sale before the change in rules if a sale was part of their plan (where the disposal may benefit from a 10% tax rate) or gifting FHL property as part of succession planning. Other FHL owners with a significant business may wish to continue to lobby for a ‘brightline’ test.

Given the impacts of abolishing the FHL regime as outlined above, obtaining advice should be considered if you own an FHL. The withdraw of the CGT reliefs available will likely result in higher tax liabilities payable in future and planning for this over the next 12 months will be key.

These changes will take effect from 6 April 2025 (for income tax and capital gains tax) and 1 April 2025 (for corporation tax), and draft legislation will be published in due course.

For further information on the end of the FHL preferential tax regime and how this might impact your hospitality business, please do not hesitate to get in touch.

Read more analysis in our Spring Budget 2024 hub.