Abolition of the furnished holiday let tax regime

By Lisa Neale, Tax Associate, Carpenter Box.

Draft legislation has been issued which confirms that Labour are moving forward with the proposal of the previous Government to remove the tax advantages of short-term holiday lets, known as furnished holiday lets (FHL). Currently, there are notable tax benefits on property which qualifies as a FHL.

What are the changes and when do they take place?

The changes are effective from 1 April 2025 for corporation tax and 6 April 2025 for income tax and capital gains tax. These affect four key areas:

1. The finance cost restriction that applies to other property business by restricting relief to basic rate, will be implemented against holiday lets.

2. Capital allowance treatment is currently available on the cost of providing furniture and equipment including white goods and beds etc. This will be removed and such costs will instead be eligible for replacement of domestic items relief.

3. Business Asset Disposal Relief (BADR) is currently available on the disposal of some qualifying FHL properties. This results in qualifying gains being taxed at a capital gains tax rate of 10%. The changes withdraw this relief. Anti-forestalling measures also apply to stop unconditional contracts to take advantage of the current rules.

4. Profits from FHLs are treated as relevant earnings for pension contributions. FHL income will no longer be considered for this purpose.

Technical points

Capital allowance pools:

Existing pools of expenditure on FHLs can continue to claim writing-down allowances due from the pool. However, expenditure incurred on or after 6 April 2025 will not enter the pool and will instead be relievable under the replacement of domestic items relief rules.

FHL losses:

Any losses are currently carried forward and only available to be utilised against future profits of the FHL business. As such property will be considered part of any normal UK or overseas letting business post 6 April 2025, losses will be amalgamated with all profits and losses from letting business. Brought forward FHL losses will be available from 2025/26 against any other property letting business.

Business Asset Disposal Relief (BADR):

If a property business that qualifies as a FHL under current legislation ceases prior to 6 April 2025, BADR will continue to apply to a disposal occurring within 3 years of cessation.

Anti-forestalling – unconditional contracts:

Draft legislation makes disposal of a FHL under an unconditional contract entered into since 6 March 2024, for conveyance or transfer after 6 April 2025 ineffective, and subject to normal CGT rules, if the purpose of the contract is to obtain capital gains tax relief under current FHL rules.

Corporation Tax: accounting period straddling 1 April 2025:

If an accounting period straddles the commencement date, that accounting period is apportioned into two separate accounting periods.

What action should I take if I own a FHL?

The removal of tax advantages for furnished holiday lets is poised to alter investment strategies. Property owners who have relied on the current tax benefits to enhance returns from their FHLs may need to consider alternative property investment strategies that might offer better tax relief.

If you’re uncertain about the financial implications of the changes to the tax rules for FHLs, it’s important to understand their impact and explore your options.

For example, you could consider selling the property. The sale of a FHL before 5 April 2025 may qualify for Business Asset Disposal Relief (BADR), meaning that the gain would be taxed at 10%. Even if the disposal doesn’t qualify for BADR, the main rate of Capital Gains Tax for disposals of residential property is currently 24% (previously 28%). The rate of Capital Gains Tax may change in future, along with any available reliefs. Any capital gains on property sales must be reported, and the tax paid, within 60 days of completion.

Alternatively, you might decide to pass the property on to someone in your family. Transferring an asset to a ‘connected relative’ is treated as a disposal at market value. This means that Capital Gains Tax will be calculated as if you had sold the property on the open market. As a FHL property is considered a business asset, it may be possible to elect to ‘hold over’ any capital gain on the transfer to relatives. However, when they later sell the property, Capital Gains Tax would be due at the prevailing rate on any deferred gains. Additionally, gifting the property could have inheritance tax implications, particularly if you continue to use the property or benefit from any income it generates.

Furthermore, the changes could have implications for estate planning and retirement strategies. The removal of FHL income as relevant earnings for pension contributions may necessitate adjustments in retirement planning for those who have been using FHL income to bolster their pension savings.

The overall impact of these changes will require careful consideration so it’s essential to seek professional advice on your potential tax liability before finalising any transaction.

For further information or advice, contact a member of our property tax team on 01903 234094 or visit our website at www.carpenterbox.com