Abolition of the furnished holiday letting regime
You may recall that our then Chancellor, Jeremy Hunt, announced in his 2024 Spring Budget that the special tax regime afforded to residential properties let as furnished holiday accommodation (known as “FHLs”) would be abolished on 5 April 2025.
Because of the general election and change in government, there was some hope or at least speculation that Mr Hunt’s announcement would be lost in the long grass and the abolition deferred or repealed. However, our new Labour government has published a policy paper including draft legislation that will bring the FHL regime to an end on 5 April 2025 as planned.
The draft legislation may be subject to change as it makes its way through parliament, but for the sake of prudence I thought it important to write to alert you to the impact of the FHL regime being abolished, which will primarily affect income tax and capital gains tax (“CGT”) arising from FHL activities.
The proposed income tax changes are what they are and will simply have to be dealt with by continuing FHL businesses and hence are not the focus of this article, but for those with FHLs who might be considering a short to medium term sale of their property, or perhaps gifting the property down a generation as part of inheritance tax or succession planning, the CGT changes are important to know about now should you wish to make use of the reliefs that will otherwise be lost from 5 April 2025.
For those already thinking about a sale in the short to medium term
Under the current legislation FHL properties are, subject to meeting the qualifying criteria, eligible for:
- Business asset rollover relief, whereby money from the sale of one qualifying asset [for example an FHL property] can be used to purchase or improve another qualifying asset [which could be another FHL, but it doesn’t have to be] and because the sale money is reinvested, tax on the gain is deferred until the replacement assets is sold; and
- Business asset disposal relief (“BADR”), whereby gains on disposal of qualifying assets including FHLs benefit from a flat 10% rate of CGT.
If you are already thinking about a sale of an FHL in the short to medium term, and if either of these reliefs would benefit you, it might be worth accelerating the sale, as a disposal of qualifying FHLs by 5 April 2025 will still afford access to rollover relief and BADR, again assuming the qualifying criteria are met.
In relation to BADR, the draft legislation suggests that, where the FHL conditions are satisfied in relation to an FHL business that ceases prior to the change in rules on 5 April 2025, BADR may continue to apply to a disposal that occurs within the three-year period following cessation. This rule exists already and allows an FHL business to cease trading, for the property to be sold within three years, and to still attract BADR. This three-year rule is helpful for medium term sales, but seeming only where the FHL business stops trading before 6 April 2025.
For those thinking about inheritance tax and succession planning
Under the current legislation FHL properties are, subject to meeting the qualifying criteria, eligible for gift relief.
For CGT purposes gifts [other than to one’s spouse or civil partner] are usually treated as deemed disposals at market value, and hence can give rise to CGT liabilities even where no money changes hands.
However, property qualifying as an FHL can benefit from gift relief whereby, instead of paying CGT at the time of the gift, the capital gain determined at that point is held over until the recipient of the gift disposes of the property, and even then, they may have accrued other tax reliefs that might help reduce the tax burden on the deferred gain.
With gift relief, you can avoid paying tax when giving assets away which makes this an important relief for inheritance tax and succession planning.
Summarising
It seems ever more likely that our new Labour government will increase capital taxes [CGT and perhaps inheritance tax (“IHT”)]. We have no visibility as to what extent and from what point in time, but we do have some visibility on their proposals regarding FHLs.
As above, I felt this article worth sharing to alert you to changes coming down the track, and to give you the opportunity to think about your FHL business, with a view to picking this up together if you have any queries or if you would like advice from me regarding how you might be impacted by the abolition of the FHL regime and whether any mitigatory action could help.
Please don’t hesitate to contact me if you have any questions or would like advice regarding the above.
Tax changes for furnished holiday lets – Part 2
Photo by Yaopey Yong on Unsplash