Spring Budget 2024 – The holiday may soon be over for some

The government has announced that they are going to abolish the favourable Furnished Holiday Lettings (FHL) tax regime which will take effect from 6 April 2025.

Where the qualifying conditions for the FHL regime are met, the owners are currently afforded the following potential tax benefits over those in relation to a non-FHL property let:

• Where an FHL business is funded with borrowing, full tax relief can be obtained for the interest payable; in contrast, this is restricted to tax relief at the basic rate for borrowings in relation to non-FHL properties.
• Potential Business Asset Disposal relief can be claimed on any gain realised on the sale of the property resulting in a 10% capital gains tax rate, compared to rates of up to 28% (soon reducing to 24%), for the gain on the disposal of a non-FHL residential property.
• There is the ability to gift part or whole of the property and delay capital gains tax by making a hold over claim or re-investing the proceeds of sale in further qualifying assets (roll over relief).
• Income generated from FHLs is classed as ‘relevant earnings’ for the purpose of making tax-advantaged pension contributions.
• Whilst, for long-term rental of residential property, the allocation of rental income must follow the percentages of capital invested – because FHLs are viewed as a commercial business – allocation of income can be more flexible.
• Capital allowances are available in relation to assets purchased for use in the property, and some refurbishment costs which reduce the tax payable on an annual basis. These are not available in respect of a non-FHL residential property let. It is unclear at this point how historical capital allowance pools are to be dealt with once the regime changes.

The main disadvantages of an FHL can be the need to pay business rates and potentially register for VAT (and charge it on the rents) if the VAT registration threshold is exceeded.  Again, it is not clear how this will be dealt with under the proposals.

Draft legislation will be published in due course, which should clarify the position on these points.

As is often the case when legislation changes, anti-forestalling rules will apply from the date of the announcement (6 March 2024). These will prevent a tax advantage being obtained by the use of unconditional contracts to access capital gains reliefs under the current FHL tax regime.

Taking all this into account, the holiday will soon be over for those who were hoping to benefit from the current FHL regime.

Contact us

If you are affected by these changes, please don’t hesitate to contact Jacqui Gudgion or a member of the Corporate Tax Team to discuss the options available to you.