Furnished holiday lettings: Where are we now?

Following the announcement in the 2024 spring Budget, we look at the changes to furnished holiday lettings rules and how these will work in practice.

Since 1984, the furnished holiday lettings (FHL) rules have enabled property owners to benefit from the tax rules on trading income. This has allowed taxpayers to claim capital allowances on furniture and equipment additions, take advantage of a reduced capital gains tax rate of 10% where business asset disposal relief (BADR) is available, and claim business asset rollover relief or holdover relief. Currently, profits from an FHL business can be treated as income for pension purposes. This means they are not affected by the restriction on finance costs for property income, nor the special rules for jointly held property.

Although there have been several tax advantages to FHL status, HMRC manual IHTM25278 makes clear that FHL properties don’t qualify for business property relief unless there’s a sufficient level of additional services provided. Schedule 9 VATA 1994 also includes FHL properties in the scope of VAT.

Changes in the 2024 spring Budget

In the spring Budget, Chancellor Jeremy Hunt announced the abolition of the FHL rules for residential property. He highlighted that while the rules have made short-term lets more attractive, they have also reduced the properties available for long-term rental by people in local communities.

The Chancellor appears to have taken the recommendations from the November 2022 Office of Tax Simplification report into account. The report considered the need for reform to the FHL rules, not only for properties in the UK, but also in the European Economic Area.

Impact of new rules

Although taxpayers will no longer qualify for a 10% capital gains tax rate (if BADR is available), the Chancellor did announce a reduction in the higher rate of capital gains tax on residential property from 28% to 24% from 6 April 2024. (There was no change to the 18% capital gains tax rate for gains on residential property payable at the UK basic rate).  In light of this, the additional capital gains tax rates for FHL properties will not be as significant as first expected.

The announcements so far appear to relate to the income tax and capital gains tax changes. We are unaware of any proposed changes to the treatment of FHL properties for business property relief for inheritance tax and VAT.

However, we’d like the government to clarify whether there will be any balancing adjustments for capital allowances claimed in respect of FHL properties and the treatment of losses prior to the abolition of the FHL rules.

The spring Budget made no reference to the fact that FHL treatment is also available to companies. We’re waiting for details of how Section 65 CTA 2010 will be affected in reference to FHL income being treated as a trade. This could have a knock-on impact on the capital gains tax relief available on the disposal of shares in companies that have carried on an FHL business.

When will the new rules take effect?

The government announced that the abolition will take effect from April 2025, and we look forward to reviewing the draft legislation when it’s published. We do however note that there will be an anti-forestalling rule introduced to avoid taxpayers rushing through a transaction to take advantage of the capital gains tax advantages for FHL properties before the new rules take effect. This will apply from the day the Budget was announced, which is somewhat different to the April 2025 date for the other changes. We’ve been talking to our members about their concerns, especially around the the lack of clarity on how these changes will impact their clients.

In the absence of draft legislation, we may not know the precise timings at a future fiscal event. But the anti-forestalling rule could have an impact on transactions which were in progress, but not concluded, on Budget day 2024. The inability to claim BADR will be an extra blow to taxpayers who may have sought to rely on rollover relief (where the proceeds from the sale of an FHL property or other qualifying asset have been reinvested in another qualifying asset) or holdover relief (where an FHL property has been gifted or sold for less than market value).