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Tax reliefs for furnished holiday lets scrapped

Last month as part of the Spring Budget, the Government announced they would be scrapping tax reliefs for furnished holiday lets (‘FHL’). This will be from 6th April 2025.

The furnished holiday lettings tax regime was initially introduced in 1982, following a few tax cases relating to whether short term holiday letting businesses should be treated as a trade for tax purposes.

The regime that was introduced does not treat the activity as a trade, but beneficial income/corporation tax and capital gains tax (CGT) treatment on disposal apply in comparison to landlords of residential properties let to longer-term tenants. These include:

  • No restriction for deduction of interest and finance costs;
  • Plant and machinery capital allowances apply, rather than a relief only for replacement of domestic items; and
  • Access to business asset reliefs for CGT.

This is particularly due to the rise in second homeowners profiting from websites such as Airbnb and the UK housing supply issue. The Government would rather favour long-term residential properties for local people rather than second homes in tourist areas.

Legislation will be introduced in the Finance (No.2) Bill 2024 for anti-forestalling rules, which will prevent access to CGT reliefs via the use of unconditional contracts, applying from 6 March 2024.

 

What do HMRC consider as a furnished holiday let?

According to HMRC’s guidance, a furnished holiday let is classed as furnished commercial property situated in the UK that must be available to let for at least 210 days (about 7 months) in the year. It must be commercially let as holiday accommodation for at least 105 days in the relevant period. Guests must not occupy the property for 31 days or more as long-term occupancy is forbidden.

 

What impact will this have from 6 April 2025?

Business Asset Disposal Relief (BADR) is currently available at the disposal of some qualifying FHL properties. This means gains that would have qualified for this relief at a capital gains tax rate of 10%.

Furnished holiday let owners will now be subject to standard residential capital gains tax rates. This rate will be 18% for gains within the basic rate band and 24% thereafter.

Capital allowances will no longer be available for fixtures and furnishings purchased for within the property. Instead, relief may be available for the replacement of domestic items in line with the rules for long term lets.

Mortgage interest will no longer be available as a deduction from profits and will instead have to be claimed as a tax reducer, at 20% of the mortgage interest costs. This will therefore exclude these costs from being eligible for higher rate tax relief.

Currently, profits from FHLs are treated as relevant earnings for pension contributions. Relief is limited to contributions of the higher of £3,600 or 100% of net relevant earnings. FHL income will therefore no longer be considered for this purpose.

 

Takeaway points

Overall, it will cost more to operate annually with the furnished holiday letting scheme.

If you own a FHL property, you may want to consider your options before the rules are abolished in April 2025. For example, selling the property and possibly benefiting from 10% CGT or gifting the property as part of succession planning.

Our Tax Director, James Greenhalgh, commented on the changes stating that the ‘abolition of the FHL regime may prompt individual investors to look at moving properties into limited company structures where full interest relief is available and for pension contributions to still reduce profits but any incorporation structure will need to be carefully considered as this will involve Stamp Duty Land Tax and capital gains tax issues that should be reviewed ahead of any decision to incorporate’.

Please get in touch with the tax team at Cowgills if you have any questions or concerns.

 

furnished holiday lets
Disclaimer

The information was correct at time of publishing but may now be out of date.

Tax
Posted by Cowgills
2nd April, 2024
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