On 29^th July 2024 the new Labour government published a policy paper on the abolition of the furnished holiday lettings tax regime. This was first muted by the previous Conservative government and is being taken forward now by Labour.

The proposed measures will come in to effect on or after 6^th April 2025 for Income Tax and Capital Gains Tax and from 1 April 2025 for Corporation Tax.

The purpose of the proposed change in legislation is to remove the beneficial tax treatment available for furnished holiday lettings and bring them in to line with the tax treatment of other property that is let out.

The overarching principle is that income arising from short term holiday lettings will simply form part of a person’s overall UK or overseas property business and thus be subject to the same rules.

This has the following implications for Income Tax:

• Finance costs (e.g. mortgage and loan interest) will only receive Basic Rate tax relief.

• Capital allowances will no longer be available on qualifying capital expenditure.
  • New exenditure incurred after 5^th April 2025 will come under the property business rules which will mean that relief is available for eligible expenditure on replacement of domestic items. The initial cost of such items is not tax deductible but when an item is replaced the full cost of replacement is allowable. This could have significant implications for an operator fitting out a new property for holiday lets as the upfront cost of furnishing and equipping the property will no longer be tax deductible
  • There is one concession in that any unrelieved capital expenditure carried forward from an existing FHL business will still qualify for writing down allowances in the usual way after 5^th April 2025 so there will not be any balancing charge or allowance on change of regime.

• Under the current regime losses generated by an FHL property business could only be carried forward and set against future FHL profits. Any such unused losses available at 5^th April 2025 will now be amalgamated into the general property business being carried forward. This will be of interest to FHL operators who have other let property that can make use of those losses. Note that UK losses are kept separate from overseas losses and the same separation will continue after 5^th April i.e. losses carried forward in an existing overseas FHL business will only be available for offset against overseas letting profits.

• Income from FHL will no longer count as UK ‘earnings’ when calculating maximum pension relief. A person can make annual pension contributions up to the lower of £60,000 or 100% of earnings so the removal of FHL income from this definition could restrict some individuals’ capacity to make pension contributions.

Apart from the reduction in certain Income Tax benefits outlined above there are also implications for Capital Gains Tax (CGT) as follows:

• When a property being used for furnished holiday lets is sold it will no longer qualify for roll-over relief, business asset disposal relief or gift relief.

• If property is sold before 5^th April 2025 and qualified as FHL under the current regime those reliefs will still be available.

• The CGT rate for FHL property currently qualifies in many cases for the lower business asset tax rates of 10%/20%. It is likely that such property will come under the residential property rates post 5^th April 2025 which are currently 18%/24%. That may be irrelevant if the new Labour government bring in measures to increase CGT rates generally which is being widely predicted.

Although property used for FHL previously qualified as business property for CGT purposes it did not qualify for Business Property Relief for Inheritance Tax (IHT) purposes so the change in regime will not have any impact on IHT.

There is one further implication from the new regime in that FHL income will no longer be exempted from the jointly held property rules. This could have significant implications where the property is owned by, say, the parents but the existing FHL business is being operated by the children or a combination of the two and the profits from FHL are divided amongst the operators as will be the case in many farm diversifications. FHL income will now come under the normal rules for jointly held property which means as follows:

• If the owners of the property are not married or in a civil partnership the income is split in proportion to the percentage ownership.
• If the owners of the property are married or in a civil partnership the income is automatically split 50/50 regardless of the proportion in which the property is owned.
• If the default 50/50 split applies the owners can make an election for the income to be split according to the percentage ownership if that differs but the split must match the % ownership and the election must be made in writing to HMRC.

It may be possible to avoid these jointly held property rules if it can be shown that the income derives from a property partnership, merely holding property jointly does not constitute a partnership.

HMRC guidance on this point includes the following:

Most cases of jointly owned property will fall short of the degree of business organisation needed to constitute a partnership. To accept that a partnership exists you would have to be satisfied that there is a similar degree of business organisation as in an ordinary commercial business. This means more than treating rental income as derived from a business of letting property - it must be business apart from that. 

This is clearly an area that needs to be explored and clarified in the remaining consultation period that runs until 15^th September 2024.

The draft paper published on 29^th July 2024 makes no reference to the implications for VAT or domestic/business rates on the abolition of the FHL regime and these too will have a significant impact on any decision as to whether to continue to provide short term furnished holiday lets. 

Adrian Stallard FCCA
Lentells Limited
30th July 2024