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One budget, one great shock to the furnished holiday let fraternity!

Is this the end of a dream?

Owning a furnished holiday let (FHL) has long been the dream for many people. It enables people to live in some of the most beautiful parts of the country while still earning an income. Escaping the hustle and bustle of a city life for the country idyll is the ultimate dream for many in retirement – the dream that many others also aspire to.

Owning a home with an adjoining holiday let can generate a good income while allowing you to take things a little easier in retirement. It’s a business that takes work, but it’s a different kind of work than most people are used to, compared to most regular jobs it’s relaxing work. The FHL also has significant tax advantages over standard long-term lets, that is until this latest Budget!

Others just want a country bolt-hole – a second home, a holiday cottage that they can use during school holidays and let out at other times of the year, earning an income that more than covers the costs of running the home, and the lucrative tax regime helped. 

It’s not all wine and roses though: a lot more work goes into running a holiday let than many people may realise. Taking new bookings, constant changeovers and cleaning take their toll and make it difficult to run a FHL from a distance. You need to rely on others and that in itself has problems. Still, it’s a business, and businesses usually get good tax concessions. You don’t expect to make money without some effort, and for this you expect some concessions on tax.

Except not: following the Chancellor Jermery Hunt’s latest pronouncements, you are no longer running a business. From April 2025, in the eyes of HMRC, despite the work involved, you’ve made a passive investment and it will be taxed as such. It will be brought into line with standard buy to lets, which themselves have suffered swinging tax increases under section 24.

Disclaimer: This article applies primarily to England and is not a full interpretation of the law, only the courts can decide. Although tenancy laws are similar in other jurisdictions, there may be significant differences. Always seek professional advice before making or not making important decisions. Use this guide as the starting point for your research, not the end point.

The old rules - the tax benefits that FHL are to lose?

  • All interest on borrowings is fully deductible against taxable profits
  • There are various capital gains tax reliefs. These include business asset disposal relief at 10% on sale and the ability to rollover the relief to another business or use the gifts hold-over relief
  • Capital allowances allow tax relief for fixtures in the property
  • Profits gained from FHLs are treated as relevant earnings for pension purposes
  • Income from a FHL which is held jointly by a married couple or civil partners is not applied to the default 50:50 split for income tax purposes

The new rules, after April 2025

According to the Government’s Beget Commentary: 

“The government will abolish the Furnished Holiday Lettings tax regime, eliminating the tax advantage for landlords who let short-term furnished holiday properties over those who let residential properties to longer-term tenants. This will take effect from 6 April 2025 and draft legislation will be published in due course.” Budget Commentary

So all of the above old benefits will go.

The Government will also abolish Multiple Dwellings Relief from 1 June 2024. Multiple Dwellings Relief, available for the acquisition of two or more dwellings, was originally intended to improve the supply of privately rented housing. However, this bulk purchase relief regime in England and Northern Ireland has not proved to be effective to that end and has been the subject of some tax avoidance schemes. Relief will be available for completions up to 1 June 2024.

The Spring Budget also introduces a reduction in the capital gains tax (CGT) from 28% to 24% on residential property gains when selling, but does nothing to offset the reduction in allowances coming down from £12,300 per person two years ago to just £3,000 after this April. There’s the strong suspicion that behind the Government’s motives lie a nudge to entice landlords to sell.  

Draft legislation is to be published in due course which will include an anti-forestalling rule. This is to prevent the obtaining capital gains relief under the current FHL rules through the use of unconditional contracts, to apply from 6 March 2024.

It’s an unwelcome shock

In the Spring Budget of 6 April 2024, the Government announced that it will abolish the furnished holiday lettings (FHL) tax regime. This change will remove the current tax advantage for landlords who let short term furnished holiday accommodation.

It brings the taxation rules into line with those who let out residential properties to longer term tenants. This change will come as a shock to those operating holiday let businesses. The impact of these changes will be felt particularly by those operating furnished holiday lets as part of a larger business operation – unless there are some concessions to come?

The rule changes will undoubtedly come as a shock to many people. The Chancellor’s scrapping of the beneficial tax advantages of holiday lets, which encouraged many buy to let landlords to enter the sector, will simplify the tax regime in the respect that all lettings will be taxed the same. It will probably satisfy the government’s aim of reducing short term lettings and release more properties either for long-term lettings or for sale.

According to The Times the number of holiday lets has risen from 8,800 in 2017 to more that 89,000 last year, with 10 percent of all second homes in England now in the sector.  While these changes represent an element of tax simplification, aligning the tax treatment of landlords, whether short or long term lets, will come as a major shock for many FHL landlords, especially those with larger FHL operations. But the growth of short term FHL has presented communities in tourist areas and coastal towns with major problems, where the shortage of long term lets for locals and seasonal workers has become a major issue.

Will they make a profit?

The profitability of holiday let businesses will inevitably be squeezed. Operating costs will increase, along with the recent period of high inflation leaving less net income for holiday let owners after paying their taxes. This could easily make some holiday letting businesses unviable, particularly those with slimmer profit margins, so undoubtedly many owners will be weighing their options and perhaps selling up.

These measures mark a significant shift in government policy, aiming to address the UK housing supply issue and the impact of short-term holiday homes on local communities. By abolishing the furnished holiday letting scheme, it seems the government is pricing landlords out of owning second homes in tourist hotspots and instead favouring long term residential properties.

The new rules will not be finalised until they appear in the Finance Act but the general outline above looks set for approval.

What are the implications of these proposed changes?

With any change different owners and operators will be affected in different ways, as everyone’s situation is different. Whilst Chancellor’s aims in abolishing the FHL regime are well intentioned, mainly to relieve the rental accommodation issue in tourist towns, there may well be some unintended consequences that the government has not so far considered. 

There will most likely be a rush to sell before the cliff edge abolition date of 6 April 2025 to take advantage of the Business asset disposal relief (BADR) currently available on the disposal of some FHL qualifying properties. It 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 will be reduced to 24% from 28% from 6 April 2024 for higher rate taxpayers. BADR will no longer be available for the FHL regime, leading to CGT payable at a higher tax rate from 6 April 2025.

There will be arguments as to what exactly constitutes an FHL property, something that existed before this latest change but will become even more important now, to determine whether or not a taxpayer was running a property trade business in respect of the property in question.  

The changes may prompt owners / landlords to look to other ways of using their properties. One such would be serviced accommodation. A serviced apartment let on a licence basis rather than a tenancy; one that provides amenities, housekeeping, and other services for guests within the cost of rental, something similar to an hotel offering extra services such as laundry and cleaning, and they sometimes include access to gyms, and even concierge services, but in a self-catering arrangement.

While these arrangements offer the prospect of achieving some of the tax benefits similar to FHLs, there are risks to this strategy. No doubt if numbers grow there will be challenges from HMRC, especially if it can be shown that the owner is not fully in control. They must be fully in control, having full access at all times to the premises and providing sufficient services to qualify as a trade.

Where owners of qualifying FHL properties have not claimed their full capital allowances – a common occurrence – they may now be encouraged to do so, claiming retrospectively the allowances they are fully entitled to. These are plant and machinery allowances on the fittings, fixtures and furnishings within the property. 

Incorporation may be the answer for larger FHL businesses, but this involves the disposal of an existing unincorporated business (properties) to a new company. It involves transferring the existing property business and its assets as a going concern and in doing so you have two main taxes for landlords to consider: Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT).

Those who are unsure about the implications of these budget changes and what to do about them should contact their tax accountant or property solicitor without delay as the Government has created a “cliff edge” in respect of some of these changes.


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