Furnished Holiday Lets - What changes are coming?

On 6 March 2024, The Chancellor Jeremy Hunt, announced in his Spring Budget the decision to abolish the beneficial tax regime available for furnished holiday lets. It has been announced that these changes will take place from 6^th April 2025.

The furnished holiday let (FHL) regime allows qualifying properties to be treated as trading assets and the income as trading income. FHLs are furnished properties situated in the UK or EEA which are let commercially for short term lets. HMRC specify the strict conditions which must be met to be entitled to the FHL regime.

The FHL regime allows owners to access favourable tax treatment, some of the key areas are shown below:

• Savings by claiming capital allowances for the purchase of items such as furniture, equipment and fixtures.
• The ability to deduct the full finance costs such as mortgage interest costs, which is no longer available for residential rental properties owned by individuals outside this regime.
• The ability to claim business asset disposal relief (BADR) at the point of sale, where qualifying this would reduce the tax applied on capital gains from 18%/24% to 10%.
• The ability to claim business asset holdover relief, allowing the gift of the property without a charge to capital gains tax on the person making the gift.
• Income tax savings, as profits can be considered relevant earnings to allow tax efficient pension contributions to be made.

We have not mentioned any relief which may be available for inheritance tax (IHT) as in most cases FHLs do not meet the trading requirements for IHT.

Following the abolition of the FHL scheme, we anticipate that most holiday lets will no longer be able to be treated as trading.

HMRC have challenged claims for rental properties to be treated as trading for a number of years. In most cases they consider that rental properties are investment assets rather than trading assets. For a rental business to be treated as a trading business, a high level of additional services must be provided.

There have been requests for a clear test to be provided by HMRC to allow property owners with some clarity on what additional services need to be provided for a rental business to be considered as trading. There are no suggestions that this will be forthcoming so taxpayers should consider their business on a case by case basis and we anticipate that the majority of rental business will not qualify.

Where a rental business is not able to be treated as trading there will be some key impacts.

• You will only be able to claim basic rate tax relief on any qualifying finance costs, such as mortgage interest.
• You will no longer benefit from claiming capital allowances in relation to the property business.
• You will have a reduction in relevant earnings for pension purposes, potentially restricting the tax relief on your pension contributions. This will depend on your other earnings and level of contributions.
• It is likely that you will not meet the trading test for BADR so any gain you make on the sale of the property will be taxed at 18% or 24%.
• No business asset holdover relief will be available, meaning that if a property were to be gifted an immediate charge to capital gains tax will arise, even if no consideration is received.

It should be noted that even with the loss of capital allowances you will still be able to obtain tax relief on certain rental expenditure, as shown below:

• Capital expenditure on the property will be deductible only at the time of sale to reduce the capital gains tax liability.
• Revenue expenditure for the day to day running of your rental business, such as agents fees, utility bills and repair and maintenance incurred on the property will be deductible from rental profit.

Costs incurred for replacement of domestic items will be deductible from rental profits. You will no longer be able to claim for the initial purchase of these items.

Following the budget, no detail has been announced to clarify what will happen for any FHL owners who have made previous capital allowance claims. It is anticipated that owners would need to treat all items as if they were sold at their current market value, creating a balancing charge on any asset which still retains a value as at 5th April 2025. This will have the impact in increasing profit levels for the 2024/25 tax year, potentially increasing or creating a tax charge.

Following the general election on 4th July 2024 we will wait to see if any changes are announced. The FHL regime has always been considered a temporary measure and therefore we would not expect any of the parties to reinstate this.

Owners of FHLs should consider the tax impact of these proposed changes very carefully. If they were looking to gift or sell the property in the near future, they may consider moving plans forward so that any transactions are undertaken prior to 6th April 2024, to take advantage of BADR or holdover relief.

Caution must be exercised here though as the budget made specific reference to anti forestalling measures. These types of measure are usually imposed to prevent taxpayers putting unconditional contracts in place to crystallise a gain prior to the rule changes, however as we have no concrete guidance, taxpayers should be aware of this when making decisions.

At Albert Goodman, we can help owners of FHLs quantify the tax impact of these changes and consider future options.