Furnished holiday lets – abolition of special tax rules

Further to the Spring Budget announcement by the Conservative party on 6 March 2024 to abolish the special furnished holiday let (FHL) tax rules, the draft legislation to move forward with these changes was released on 29 July 2024.

What does this mean for FHL owners?

From April 2025, the specific tax treatment and separate reporting requirements for FHLs will be removed.

The key benefits that will be removed include:

• Exemption from finance cost restriction rules (which restrict loan interest to a basic rate tax reducer for income tax purposes)
• More beneficial capital allowance rules on fixtures and furniture
• Access to reliefs from taxes on chargeable gains for trading business assets including gift holdover relief, business asset disposal relief (10% tax rate) and rollover relief
• Inclusion as relevant UK earnings for pension purposes

The operative date of the changes will be from 6 April 2025 for income tax and capital gains tax and from 1 April 2025 for corporation tax.

Transitional rules

Some specific transitional rules will apply:

• Capital allowances – those owning FHL properties will no longer be eligible for beneficial capital allowance treatment but will instead be eligible for replacement of domestic items relief in line with other property letting businesses. Where an existing business has an ongoing capital allowance pool they can continue to claim writing down allowances on that pool. This is good news for those who were concerned in relation to capital allowances being clawed back. Any new expenditure from the operative date must be considered under the new rules
• Losses – the proposed loss rules allow for FHL losses to be used flexibly going forwards against property profits.
• Capital gains reliefs – under the current rules FHL properties are eligible for rollover relief, business asset disposal relief (10% tax rate), gift relief, relief for loans to traders and exemptions for disposals by companies with substantial shareholdings. After the changes the eligibility for the reliefs will cease. However, where criteria for relief includes conditions that apply in a future year, these specific rules will not be disturbed where the FHL conditions are satisfied before repeal.
• In relation to business asset disposal relief (10% tax rate), where the FHL conditions are satisfied in relation to a business that ceased prior to the change in rules, relief may continue to apply to a disposal that occurs within the normal 3 year period following cessation.
• There is an anti-forestalling rule. This prevents the obtaining of a tax advantage through the use of unconditional contracts to obtain capital gains reliefs by selling to a connected party. This rule applies where exchange was on or after 6 March 2024 (i.e. the date of the Spring Budget) and there is an onward sale to a third party after 5 April 2025.

Whilst comments on the draft legislation can be made by 15 September 2024, it appears the Labour government is moving forward with these proposals.

When the loss relief restriction rules were introduced for residential landlords they were phased in over 4 years, however there does not appear to be any phased approach here for the changes to FHL property owners. This could impact hard on those with significant borrowings against their FHL properties.

Areas to consider

Now it appears that Labour wish to move forward with the Spring Budget proposals, FHL owners should consider the impact of the changes from April 2025 to them.

There may be options open to owners now which will no longer be open to them in future. Owners who have previously enjoyed flexible sharing of income may be impacted as well as those with significant debt or planning large capital projects. Those impacted by these changes may wish to take advice now in order to have an opportunity to make the most of the existing tax reliefs.

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