ICAS response: Abolition of furnished holiday lettings

We drew attention to how the proposed changes to the definition of ‘relevant earnings’ for pension purposes in Section 189 Finance Act 2004 would impact taxpayers who operate a furnished holiday lettings portfolio as a full-time occupation, in comparison with the less onerous time commitment associated with a portfolio of properties let out for longer-term rental. We explained how this would limit their personal contributions to the £3,600 ‘basic amount’ under Section 190 Finance Act 2004, a threshold which hasn’t increased since the legislation was introduced.

We highlighted how the exclusion of FHL income from the definition of relevant earnings would create a distinction between those who operate a FHL business as an individual, compared to operating through a company. A director/shareholder of a company carrying out a FHL business would have relevant earnings from any employment income they receive from the company. The company could also make employer pension contributions without any net relevant earnings being necessary to match against the pension contributions being made.

We described how a taxpayer is currently able to pay Class 2 National Insurance contributions when they run a FHL business but don’t have any other sources of employment or self-employment income. If FHL will no longer be classed as a trade from April 2025, this may impact their ability to maintain their National Insurance contributions record in a cost-effective manner.

We also noted how removing exception for FHLs from the rules in Section 272B ITTOIA 2005 (restricting the tax deductibility of finance costs on dwelling-related loans to the UK basic rate) would create a ‘cliff edge'. We suggested that the changes be phased in as per the original rules, over four tax years.

Areas where additional guidance or clarification would be helpful

Most of the areas of continued uncertainty are in respect of capital gains tax. Whilst we welcomed the confirmation that genuine commercial transactions during the 2024/25 tax year should be unaffected by the anti-forestalling rule (particularly where these are between unconnected third parties), we think HMRC needs to publish more details about how the mechanics of making a claim where the anti-forestalling rule doesn’t apply will operate in practice.

We feel there needs to be guidance on the evidence required to support any claim that the anti-forestalling rule doesn’t apply, and on what constitutes a genuine commercial reason. At our recent webinar, our members flagged a situation where a FHL business may no longer be commercially viable due to the proposed changes (for instance, due to the change in tax relief available for finance costs). It’s unclear whether HMRC would accept that such a scenario would be caught by the anti-forestalling rule for transactions, i.e. where the taxpayer has decided to sell a property that is no longer commercially viable as a FHL but would have continued as a FHL if the tax rules hadn’t changed.

HMRC has confirmed that FHL businesses that cease before 5 April 2025 should still qualify for BADR for the usual three years post cessation, subject to meeting the qualifying criteria and the taxpayer not having already used their lifetime limit. However, the legislation doesn’t currently make clear whether the abolition of the FHL rules will itself be treated as a deemed cessation of a trade for the purpose of BADR. We also feel that it's important for HMRC to confirm that any transactions before budget day on 30 October 2024 would be unaffected by any potential changes to the scope or application of BADR announced in the forthcoming budget.

We have also commented on the need for HMRC to confirm the treatment of existing provisional claims to rollover relief. For example, a taxpayer may have sold a FHL property in a previous tax year and made a claim for provisional rollover relief in anticipation of purchasing a further property to be used in a FHL business. Similarly, we received feedback that our members would appreciate confirmation that gains previously held over on FHL properties gifted or transferred at under value will not be subject to a claw back of relief received before the rules are changed.

Form 17 – a particular Scottish dimension

Anecdotal feedback from our members suggests that couples who own FHL properties are more likely to allocate the profits from that business in a ratio other than 50:50, compared with longer term lettings. Removal of the exception will withdraw the current flexibility of FHL owners to split profits unequally, regardless of the ownership. For instance, where one spouse or civil partner may give up their full-time employment to run the business but would be unable to receive a greater proportion of the profits in future tax years, despite devoting a more significant time commitment than the other spouse or civil partner.

The removal of the exception for FHLs in Section 836 ITA 2007 will therefore have an impact on jointly owned property owned by couples who are married or in a civil partnership and don’t wish for profits/losses to be shared 50:50. Given the proximity of the proposed changes taking effect, we feel that the government should give consideration to extending the time period under which an election can be made under Section 837 ITA 2007. This extension would be particularly relevant in the context of those taxpayers who will be required to complete Form 17 as a result of the proposed changes to the FHL rules.

We also drew attention to the application of the term ‘beneficial interest’ throughout the different UK jurisdictions. Feedback from our members has highlighted that under Scottish law this is a term not applicable in Scotland in the same way as elsewhere in the UK. We highlighted how this has already presented some practical challenges for longer term rented properties where Form 17 is appropriate. Including FHL properties in the rules will increase the number of Scottish taxpayers who may be affected.

Finally, we suggested that HMRC look into the different legal definitions across the UK and issue some guidance. Alternatively, a simpler solution may be to remove the requirement to complete Form 17 for couples who are married and in a civil partnership to align the treatment with unmarried couples owning rental properties in similar circumstances.