April 25, 2024
Article
In the 2024 Spring Budget, the government announced it is to abolish the Furnished Holiday Lettings (“FHL”) tax regime, eliminating the tax advantage for landlords who let short-term furnished holiday properties. These changes will take affect from 6 April 2025 for income tax and capital gains tax and 1 April 2025 for corporation tax purposes and draft legislation will be published in due course.
In addition, we are advised the draft legislation will include an anti-forestalling rule. This will prevent anyone obtaining a tax advantage using unconditional contracts to obtain a capital gains relief under the FHL rules. This will take affect from the date of the Budget, being 6 March 2024.
The government believe this will generate around £300million from landlords but what does this mean for FHL owners?
Well, properties that qualify as FHLs currently take advantage of favourable tax benefits compared with other property businesses.
For a start, income from a FHL business is treated as earnings for the purpose of making pension contributions, unlike income from property, which is treated as investment income.
For income tax purposes, FHLs also currently benefit from:
- Unrestricted income tax relief for finance charges and mortgage interest.
- Flexible profit-sharing; and
- Capital allowances on items of furniture and fixtures and fittings within the property.
With regards to capital allowances, in many circumstances the initial outlay may have created substantial income losses or a large capital allowance pool from which to claim. We will have to wait to see how the transitional rules deal with this going forward.
As a planning point, if your FHL property has not undergone a capital allowance review, then please do get in contact with us as soon as possible as there could be an opportunity to review this and ‘bank’ the allowances before the changes come into force.
For capital gains tax (“CGT”) purposes, FHLs qualify as business assets and therefore benefit from CGT reliefs.
For instance, if you sell an FHL and it meets the qualifying criteria, the gain (if within your £1m lifetime allowance)can be taxed at 10%, compared with 24%, for higher rate taxpayers, on the disposal of long term lets.
As a business asset, FHLs can also currently be gifted, say to your children, with no immediate tax charge.
In addition, FHLs can qualify for rollover relief, which can defer gains on reinvestment, although this would be restricted by any period the property was not used as an FHL.
If you are looking at either reinvesting, gifting or selling your FHL, please do get in touch to consider the impact of the proposed new rules, sooner rather than later.
For Inheritance tax (IHT) purposes, there is no special treatment for FHL properties. Generally, the market value of any FHL property (net of any liabilities) falls within a deceased estate and is subject to IHT in full.
To qualify for Business Property Relief (BPR), which provides relief for IHT purposes, FHL owners have to demonstrate that services have been provided ‘above and beyond’ what would normally be expected of just holding an investment. The level of services provided having to be more akin to a hotel. As such, there have been very few cases where BPR has been allowed. While this means there is no change to the treatment of FHLs, perhaps by removing the ‘special treatment’ for FHLs, will help reduce any ambiguity.
A key question you may ask is whether this will impact the VAT position.
Currently, income from long term lets is exempt for VAT, whereas income from FHLs is Vatable. With FHL owners having limited VAT costs, it would therefore be great news for most landlords if these changes removed the requirement to be VAT registered.
If the government’s aim is to simplify the tax system and put FHLs on a level playing field with normal property lets, I personally don’t feel it sits right if FHLs continue to be a vatable supply. However, if the government’s main objective here is to raise revenue, this change would be unlikely. Unfortunately, it also sounds unlikely when speaking with our VAT specialists too. For VAT purposes, as for IHT purposes, FHLs don’t have any ‘special’ regime. Instead, the VAT legislation purely stipulates that ‘income from self-catering holiday accommodation’ falls within the scope of VAT. So, unless we are going to have a change in VAT legislation, then this will not alter. As a result, FHL owners will be in the worst of both worlds – chargeable VAT income but with no beneficial income tax or CGT reliefs.
Assuming the FHL income remains chargeable to VAT, a big consideration, will be whether a FHL owner should decide to rent the property as long term lets instead. Unless the property is opted to tax, the change of supply would mean the property income becomes an exempt supply. If this resulted in the property business de-registering for VAT, then there could be a claw back of VAT previously claimed, on de-registration.
Please do therefore speak with us to consider these implications, before making any decision.
We’ll keep you updated as and when more is published but, in the meantime, if you would like to discuss your position ,please do get in contact.
Following on with the VAT and holiday accommodation theme, please see Steve’s article next that focusses on a case regarding the Tour Operators Margin Scheme.