Great uncertainty surrounds the abolition of the furnished holiday let tax relief
Landlords who operate furnished holiday lets (FHL) have been anxiously awaiting further guidance on the proposals put out in the March Spring Budget, so far with no avail. Now that the government is in recess, people are beginning to wonder whether or not the proposed measures will survive?
Following the bombshell dropped by the Chancellor in his Spring Budget, abolishing the long-standing furnished holiday let (FHL) tax regime, there’s been little information put out to further enlighten us.
The lack of any detailed guidance ahead of the forthcoming general election has left those in the business very much in the dark. That’s according to Paul Aplin, writing for AccountingWeb.com, and from various other sources.
The announcement in March that the FHL regime was to be abolished commencing April 2025 came as a complete shock to most landlords who operate in the sector, many of whom are long established and operating substantial businesses.
If the full measures are implemented as proposed in the Budget, the regime will switch to the far less generous buy-to-let tax regime, abolishing the Capital Gains Tax relief on the disposal of FHLs, which usually qualify for Business Asset Disposal Relief (BADR), where the first £1m of lifetime gains are taxed at 10%. Alternatively, the gain can be ‘rolled over’ on the purchase of a new business asset. But from April 2025, that long-standing concession is supposed to go, with an amended residential property CGT tax rate of 24% replacing it.
What’s more, interest relief on loans for FHL businesses, currently treated as a deduction from rental income, would be taxed on turnover, as is the case for buy-to-lets. From April 2025, relief is scheduled to be given as a 20% tax credit. In effect, the chancellor is taking away from FHL its “business status” under the HMRC tax regime and giving it “investment status”, as is the case with buy-to-lets.
So, for higher and additional rate taxpayers, owning holiday lets in their own name, this means a massive reduction in tax relief, down from 40% and 45% respectively.
“What surprised me was the lack of practical detail surrounding the announcement,” says Paul Aplin.
If you own a furnished holiday let (FHL) in the UK you’re going to be wondering what on earth is going on. Uncertainty is increasing around the issue in the absence of concrete information coming from the government.
For those involved with FHL businesses it goes without saying that in order to make plans for the future you need to know for sure which way to go: it is palpably unfair to leave people in the dark on a matter that’s so important to their livelihoods.
The furnished holiday lettings regime has traditionally given business status to the sector, meaning it enjoys considerable tax advantages to those enjoyed by buy-to-let businesses, which carry investment status as far as HMRC is concerned.
However, there are some strict rules to be followed if a FHL business is to benefit from the tax advantages: these must be short-term lets, being available to let for at least 210 days a year and actually let for at least 105 days, within that period. Properties meeting the criteria should then benefit from various quite generous tax reliefs, including capital allowances, and as mentioned above, the more favourable Capital Gains Tax (CGT) treatment.
The concern from the government was, given the relative stinginess of the buy-to-let tax concessions, making it difficult for these landlords to make a reasonable profit, more and more landlords had been moving over to short-term lets, claiming FHL status. Moreover, many second home owners, with holiday accommodation for their own use, were able to let under the regime, also paying the more advantageous business rates instead of Council Tax.
As a consequence to these advantages, some parts of the country are being starved of long-term rental accommodation, which has been particularly affecting locals and seasonal workers in many seaside resorts, in counties such as Cornwall and Devon. Hence the government’s change of heart on the FHL regime, though no one expected such a harsh response.
In addition to the tax regime itself, the government announced it’ll be introducing a ‘holiday let registration scheme’. Such a scheme would make it mandatory for all holiday lets to be registered with the government, by means of an online portal intended to provide government with reliable data on all of the holiday lets operating in the UK.
The thinking behind this is, the register would give an insight into the impact of short-term holiday lets on local communities, it would lead to improved understanding of the issues surrounding FHL, and may highlight opportunities for tourism support for local communities.
We are still awaiting further details of these schemes. The announcement of the election on July 4th, with the government now in recess, is adding to the uncertainty – the latest government provided guidance on Furnished Holiday Lettings (HS253) on their website is updated on 6 April 2024.
Paul Aplin writing in AccountingWeb.com, says:
“Even if the government backs down from abolishing the FHL regime they are clearly keen to remove the tax advantages. While no definitive guidance has been issued, it’s essential to stay updated on any announcements or legislative changes that may affect your property business.”
The big question is, will any more information be issued prior to the election, and with the possibility of a Labour government, will the plans remain the same?
Paul Aplin continues:
“The COVID-19 pandemic had a huge impact on the tourism and hospitality sectors, including furnished holiday lettings. Lockdowns and travel restrictions led to reduced occupancy rates, making it harder for property owners to meet the required letting days.
“As the government looks to tighten tax compliance and increase revenue, furnished holiday lettings have come under greater scrutiny. Property owners may face more rigorous checks to ensure they meet the qualifying criteria for FHL status. Maintaining accurate records and demonstrating compliance is more important than ever.”
All that is known for sure, to-date, is from the information published in the Overview of Tax Legislation and Rates (OOTLAR), which simply states:
“The government will abolish the Furnished Holiday Lettings tax regime, eliminating the tax advantage for landlords who let out short-term furnished holiday properties over those who let out residential properties to longer-term tenants. This will take effect from April 2025.
“Draft legislation will be published in due course and include an anti-forestalling rule. This will prevent the obtaining of a tax advantage through the use of unconditional contracts to obtain capital gains relief under the current FHL rules. This rule will apply from 6 March 2024.”
As the measure was not included in the Finance Bill, there were no updates indicated as to what the anti-forestalling rules will be.
Paul Aplin says:
“Various professional and trade bodies have made representations and there was a brief Westminster Hall debate on 1 May. No formal consultation is planned. This is not the first time that the FHL tax regime has faced the death sentence, and before it happens – if it happens - taxpayers deserve fair warning so that they can plan sensibly.”
“MPs who spoke in the Westminster Hall debate naturally highlighted issues in their own constituencies. In many, holiday accommodation is a key part of the local economy; in others holiday properties and second homes reduce the available residential housing stock for local people.”
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