Furnished Holiday Lets regime – advice on abolition of tax rules
© Adobe Stock Farms running furnished holiday lets (FHLs) will lose significant tax advantages next year, following confirmation from the government that a plan originally announced alongside this year’s spring Budget is being implemented.
This will remove capital gains tax (CGT), loan interest, capital allowances and income tax advantages from FHLs.
Draft legislation has been published and once the rules change, FHL properties will form part of a person’s UK or overseas property business and be subject to the same rules as non-furnished holiday let property businesses, says HMRC.
Transitional rules will ease the impact in a limited number of cases.
The changes will affect FHL businesses to varying degrees, and it is important to make informed decisions based on your aims and circumstances, says Heather Britton, tax director at accountant PKF Francis Clark.
See also: Diversification advice and case studies
“Don’t panic, but do review the business and understand what the changes mean for you,” she says.
“It’s a balance between rushing into a decision, particularly with property based matters, but if you are contemplating changes already, it might be worth considering whether to accelerate those. Consider what options are open to you now that may not be open to you in future.”
Varying impact
The change will hit some businesses harder than others.
For example, those with high borrowings will be most affected by the move to restrict the amount of interest that can be set against earnings from holiday lets.
Mike Butler, a partner at PKF Francis Clark, says it is not uncommon for those with several holiday lets to have significant borrowings against the operation and be incurring an annual interest charge of, say, £40,000.
“If you’re going to lose half of the tax relief on that as a result of the drop from 40% to 20% relief, that’s an £8,000-a-year hit,” he says.
In addition, more profits may be pushed into higher rates, leading to further tax rises.
The move also means earnings from furnished holiday lets will no longer be eligible for tax relief on pension contributions.
However, it is CGT and the capital allowances changes which will have the greatest overall impact, with the loss of gift holdover relief and business asset disposal relief from CGT when passing on FHL assets.
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Capital allowances
Review capital spending on FHL operations – both past and planned, say advisers. Consider whether to accelerate planned expenditure where it makes sense to do so, so that it is incurred before 5 April 2025, advises Heather.
“It’s a good time now for people to review and claim on fixtures – a lot of people don’t realise they can claim on their kitchens, bathrooms, central heating and so on in FHLs; they may have claimed only on the furniture.”
This analysis is particularly important for FHL conversion, purchase, renovation and new build projects, whether current or recent, where all qualifying expenditure needs to be carefully identified.
“As long as the item is still in existence, they can still make the claim. You are also able to go back a year and review capital expenditure so you can amend last year’s tax return and claim 100% tax relief on qualifying expenditure under the annual investment allowance (up to £1m limit).
“In future, under the new regime, you will still get tax relief for repairs to the property or replacement furniture, but not for improvements or to expand the business.”
Business structure, asset ownership
Accountants advise FHL operators to review the position in terms of how the property is owned.
There is no correct formula for this, as much depends on how any diversification fits within the overall farming business and the degree of trading versus investment activity for inheritance tax purposes.
“Some might consider putting the property into the partnership or adjusting ownership proportions and make relevant elections to HMRC so that profits can be shared income tax-efficiently,” suggests Steve Maggs, tax partner with Cornwall-based accountant RRL
Capital gains tax
The prospect of losing the ability to gift FHL property without an immediate CGT charge will be of great concern to many, say accountants, especially where there is borrowing set against the property, which will in turn complicate the transaction.
There may also be stamp duty land tax implications to factor in on gifted property where there are borrowings. The time constraints will also make transfers challenging.
“Those considering selling or gifting currently qualifying FHL properties will need to consider timing – we’d suggest exchange of contracts on sales, and gifts made, before 30 October 2024, the date set for the Budget,” says Steve, adding that advice should be sought on the anti-avoidance rules in the draft legislation.
“There is a general expectation for CGT rates to increase and a lot of people want to bank the current rate, irrespective of the FHL changes.”
Sell up?
Many, including those approaching retirement, may have been contemplating selling for some time, especially in areas where the trade is challenging.
Those decisions may be hastened by the knowledge that these changes are definitely going to come in, says Heather.
However, there are already a lot of holiday properties going on the market, she says, and in some areas the market is saturated.
“About one in three FHL properties may have a ‘holiday let restriction’ so they can only be used for holiday lets.”
This is a planning restriction which will limit the range of potential buyers. Heather’s colleague Mike says given that the FHL move was originally designed to free up accommodation to the longer-term rental market or for sale, so planning authorities may, hopefully, look favourably on lifting these restrictions.
A further consideration when selling is the proximity of the current holiday let to the farmhouse or operations – not all are in a suitable position from either the farm’s or the buyer’s perspective.
Renting on a normal assured shorthold tenancy is a further option, but the above considerations apply there too.
Main changes to FHL tax regime from April 2025
- Loan interest will no longer be fully deductible from FHL profits. Instead, only a 20% tax reducer will be available.
- Capital allowances including the annual investment allowance of up to £1m for capital expenditure, for example on plant and machinery, furniture, equipment and fixtures, will cease from 6 April 2025. Transitional rules mean there will be no clawback of allowances claims and any pools can be carried forward to set against future property profits. It will be possible to claim tax relief on repairs to the property and replacement furniture, washing machines or other equipment. There will be no immediate relief for capital improvements, such as fixtures in an extension, points out Steve Maggs, but these will be allowable against the capital gain on the eventual sale or gift of the property.
- FHL businesses will lose eligibility for business asset disposal relief (BADR), which fixes CGT at a 10% rate on qualifying capital gains when an FHL is sold or gifted, with an individual lifetime allowance of £1m. Instead, sales of FHLs will be taxed at standard residential property CGT rates – 18% for basic rate taxpayers and 24% for those on higher-rate tax, although the October Budget may alter this. An exception will be made to the above point for FHLs that cease trading before the repeal of FHL tax rules or on 5 April 2025 as a result of the changes. Where these qualify as FHLs and the claim meets the rules otherwise, these will still be eligible for BADR where gains are realised up to three years after the date of cessation, reducing the effective CGT rate to 10%.
- Rollover relief from CGT will no longer be available on gains where FHLs are sold after 6 April 2025. Sales before this date may qualify for rollover relief – clarification is awaited on this. Capital gains gift holdover relief will be removed on 6 April 2025 – this currently allows gifting of FHL properties without immediate CGT liability.
- FHL income will no longer count as relevant UK earnings for personal pension tax relief. The ability to share FHL profits flexibly between property owners will no longer be available.
- New rules will prevent a tax advantage through the use of unconditional contracts to get CGT relief under the current FHL regime. These will apply from 6 March 2024.
Tax impact of FHL regime abolition
The impact of abolishing the tax advantages for the FHL sector is expected to earn the Exchequer an additional £35m in 2025-26, then in the following three years £140m, £180m and £245m.
Furnished holiday lets sector – the background
The FHL sector has had its own favourable tax regime for about 40 years. During that time, many farm businesses have diversified into genuine holiday letting operations.
Advisers make the distinction between these and second homes, where a property is often run not as a business but let now and again simply to help cover the cost of owning and running a second home.
Such operations often do not qualify for the FHL tax benefits, as strict rules apply in terms of the numbers of days a property is available to let and the number for which it is actually let.
The UK rented holiday home market has expanded over the past few years, with Covid restrictions leading to much higher demand.
Now that overseas holidays are easier, the UK holiday business is more difficult, running costs have escalated and customer expectations are high.
A big increase in weather-driven late bookings is not helping and larger properties in particular are becoming more difficult to let.
“Those using letting agents rather than doing their own marketing face commission costs of up to 30%,” says Steve Maggs of accountant RRL.
VAT reminder
From 5 April 2025, those offering holiday accommodation will still have to charge VAT on holiday rental charges where they are VAT registered.
Some operators may assume that the FHL changes mean this is not the case.