Holiday let owners braced for increased tax bills now face a period of uncertainty about when - and if – the favourable Furnished Holiday Letting regime will be axed.
In his Budget speech back in March 2024, Chancellor Jeremy Hunt, announced the abolition of Furnished Holiday Letting (FHL) tax reliefs from April 2025. Normally details of budget announcements are contained in the press releases issued on budget day and are followed shortly afterwards by draft legislation. In this case, there was a single paragraph issued on budget day, which was short on detail, and since then no further information has been published regarding the announcement.
As we all know, political events move quickly, and the General Election expected in the Autumn has been called for 4th July. This means that it is now unlikely that there will be any new legislation before April 2025. Only time will tell if the next Government will implement any changes.
It is important to note the definition of a FHL in order to benefit from the tax reliefs currently available.
Conditions to be met for an FHL property
The property must be available for letting for at least 210 days a year.
It must actually be let for at least 105 days a year.
The property must not be let to the same person for periods of more than 31 consecutive days, or for more than 155 days in one year.
Tax advantages of an FHL
For income tax, a taxpayer can obtain full tax relief for loan interest on a loan taken out to purchase a property. Since April 2017, income tax relief available for the finance costs on the purchase of a normal let property has been restricted. These restrictions do not apply to FHL.
Capital allowances, which reduce the taxable profits of a FHL, are available against the cost of purchasing equipment. There is no similar relief for ordinary let residential properties.
Profits from an FHL are treated as earned income for the purposes of making pension contributions.
For capital gains tax (CGT) purposes, the FHL property is treated as being in business use, which means certain reliefs may be available:
Business Asset Disposal Relief (previously known as Entrepreneurs’ relief) - can reduce the rate of tax paid on a sale to 10%.
Rollover relief –the gain on the sale of another business asset may be rolled into the purchase of a FHL, or the gain on the disposal of a FHL may be rolled into the purchase of another qualifying asset.
Holdover relief - a CGT on a gift of a FHL is deferred until it is sold in the future.
When it comes to Inheritance Tax (IHT), following a number of successful HMRC challenges in the courts, it is extremely difficult to convince HMRC that FHL qualify as a trading business in order to benefit from Business Property Relief (BPR). Therefore, in most cases a residential property used for either FHL or normal letting will be chargeable to IHT unless they are part of a larger trading business.
If an FHL business makes losses, they cannot be offset against other sources of income, but have to be carried forward and set against future FHL income.
Income from FHL has always been treated as a standard rated supply, and hence subject to 20% VAT if within a VAT registered business. Rent received from long-term lets are exempt from VAT. We do not expect any new legislation to change this VAT position.
If you would like advice and support about the tax issues relating to your furnished holiday let, please get in touch. Call 0808 144 5575 or email help@armstrongwatson.co.uk.
