Furnished Holiday Lets - A window of opportunity

While the restriction of inheritance tax reliefs might by closing some doors, there are some windows of opportunity for furnished holiday let (FHL) businesses.

Although not taking the current headlines, FHLs have managed to appear throughout our Newsletters this year – from the initial announcement in the Spring budget that the FHL regime is to be abolished from April 2025 to the landing of the draft legislation in the summer.

While I now want to bring you up to speed on HMRC’s recent clarification, I am also banging the FHL drum, as I don’t want you to miss some potential windows of opportunity before the rules change.

So, let’s start with some of the clarification.

For VAT purposes, there is no change. HMRC have confirmed that FHLs will continue to be standard rated for VAT purposes.

For income tax purposes, from 6 April 2025 you will no longer be able to claim capital allowances on fixtures, fittings and furnishings in the property. Instead, you can claim ‘replacement of domestic items relief’, providing relief on the replacement, but not the initial purchase of like for like capital items.

The good news here is that where capital expenditure has been incurred and has created a capital allowance pool pre-1 April for corporation tax purposes and before 6 April for income tax purposes, allowances can be claimed on that pool until it has been used in full.

In addition, any FHL loss will be treated as a property business loss going forward and can be offset against other property income. It’s therefore important to ensure you’ve ‘banked’ these capital allowances before the rules change.

When a FHL commences, it must meet the qualifying criteria, including an occupancy period of 105 days in the first 12 months from the date of commencement. HMRC have clarified that, where the FHL business commences in the 2024/2025 tax year, the occupancy conditions will begin on the first day of let and may extend beyond 5 April 2025, albeit the FHL will only be treated as a FHL up to 5 April 2025. This means that if the property business qualifies as a FHL business, it can ‘bank’ the capital allowances that would otherwise be lost.

So, that’s the start of the business, let’s now move forward to cessation…

While the FHL regime is being abolished from April 2025, this does not automatically mean the FHL business ceases on that date – it merely means the FHL tax regime no longer applies.

The property business will therefore be treated as continuing unless the business actually ceases. This is vital if you wish to rely on business asset disposal relief (BADR) for CGT purposes, which is available for three years after cessation. However, this is a very complex area so if you are considering claiming BADR, please do ensure you obtain professional advice.

With IHT reliefs taking the headlines, there is currently a lot of discussion around gifting assets to the next generation. As you will have read in Sam’s article, while agricultural property may be gifted in lifetime with no immediate tax charge, gifting residential property can incur a hefty CGT charge, without using trusts. However, if the property qualifies as a FHL, there is a window of opportunity until the rules change in April 2025, for the property to be gifted with a holdover election, which means no immediate CGT charge.

If you’d like to discuss this or any of the topics in our Newsletter, please do get in touch.