Ahead of the new Chancellor’s Budget, planned for 20 October 2024, a number of publications have been released setting out changes which will be brought into force on 5 April 2025.
The previous Government had already announced that the Furnished Holiday Lettings (FHL) rules would be abolished, but surprisingly the measure was not included in the Finance Act that was hurriedly passed before Parliament was suspended. Many had hoped that this might fall by the wayside, but unfortunately, the latest release by the new Government confirms that the changes will happen. We also have further details about how this will work in practice.
Who will be affected by the changes?
In their release document, the Government states that “There is no impact on individuals as this measure only affects businesses.” Of course, the irony of this statement is that these measures propose to stop treating FHLs as businesses. As a result, many individuals are affected, as well as many companies that have properties that formerly would have qualified for the regime.
When are the Furnished Holiday Lettings rules being implemented?
These rules will come into force on 6 April 2025 (1 April for companies). However, there are some anti-forestalling rules which prevent artificial CGT arrangements from being put into place, and these are backdated to 6 March 2024 (i.e., the date of the last Conservative Budget).
Key Proposals
- The aim is to remove the tax advantages currently available to landlords who let property on a short-term basis, with the intention being to encourage the supply of more permanent letting opportunities for people looking to live full-time in a particular area and not just holidaymakers.
Income/Corporation Tax
- For individual owners, currently, full tax relief is given on the cost of mortgage interest for qualifying FHL properties. This is different from those with standard rental properties, who can only claim a basic rate tax reducer (see our article on Interest Relief for Private Landlords for more details here). This has been a real problem for many individual landlords who have either been pushed into a higher tax bracket or, in some cases, found themselves paying tax on properties which, in reality, are loss-making. This has resulted in many landlords who own property personally trying to incorporate to take advantage of the fact that companies still obtain full relief.
- In addition, prior to the changes, both corporate and individual landlords of FHLs can claim Capital Allowances against their profits. This too is being abolished for both. However, for those who are already claiming capital allowances, they will be able to continue to do so but only on expenditure that is already included within a capital allowances pool.
- Any new capital expenditure will either need to be covered by the Replacement of Domestic Items relief, or if it does not qualify for that, the cost will go unrelieved until the property is sold. This will apply to costs that would previously have qualified for capital allowances on the basis of being Integral Features.
- At present, it is possible for individuals to include income from FHLs when calculating relevant UK earnings for pension relief. This too will be scrapped from next April.
Capital Gains
- All the existing Capital Gains Tax (CGT) reliefs will also be lost. This includes Roll-Over Relief, Business Asset Disposal Relief (BADR), Gift Holdover Relief, relief for loans to traders, and the Substantial Shareholdings Exemption (SSE).
- Losing all of those reliefs is a blow, with perhaps the loss of BADR being the most significant for most landlords.
- Currently, qualifying FHLs may qualify for the reduced BADR, and only suffer 10% CGT on gains made on disposal. Abolition of this will mean that higher rate taxpayers will in future suffer the full 24% rate on disposal gains. There do not seem to be any transitional rules to soften this, although anti-forestalling rules already in place will prevent the use of unconditional contracts being used to accelerate the sale date to fall into the BADR regime before the changes happen. Of course, it is possible that the rate of capital gains tax may be much greater than the current 24% following the Budget later this year.
- For companies with FHL subsidiaries, losing SSE will also cause cash flow issues. Currently, when qualifying FHL subsidiaries are sold, the holding company may not suffer a charge to Corporation Tax because they are treated as trading entities. All this will change next year.
Inheritance Tax
- No mention of any changes to the Inheritance Tax regime were included, but it can be assumed that given HMRCs reluctance even now to grant Business Property Relief (BPR) on FHL businesses, the situation will not improve.
What next?
Going forward, Furnished Holiday Lettings will simply be treated in exactly the same way as any other let property, although there are a few positive takeaways. For example, losses made by an FHL in future will be available to offset against any other letting profits, rather than restricted to use against the FHL portfolio only. This may be useful for landlords with mixed portfolios.
In addition, where there are already losses being carried forward, they will continue to be available to offset against future rental profits post April 2025. This, coupled with the ability to continue to claim writing down allowances on previously pooled capital allowances is welcome news. The initial announcements in last year’s Budget by the former Government did not confirm this and left many wondering whether there could be a painful claw back in the same way there had been for those withdrawing from the FHL regime voluntarily.
The Government’s commitment to encouraging FHL landlords to sell to improve the supply of properties is borne out by the fact that they have conceded that where an FHL business ceases prior to 6 April 2025, BADR will still apply if the property is disposed of within 3 years of the business ceasing. So those who are considering exiting the market may be able to take advantage of this, even if the anti-forestalling rules prevent some of the other opportunities to minimize CGT.
For individual owners, there may still be the option to incorporate as the corporation tax rules continue to be slightly friendlier. However, careful planning will be needed to work around the potential CGT and SDLT charges that may arise. Moreover, it is important that the perceived tax benefits are weighed up against the commercial costs of transitioning, including refinance and the ongoing running costs of a company. For some, it is a no-brainer if it can be achieved with little or no tax leakage. For others, it may be better to stay as you are.
If you have any concerns about the Furnished Holiday Lettings tax regime or would like to discuss the planning opportunities in more detail, please contact a member of the Gravita Tax Consultancy Team here.
