The transitional rules have just been announced for the closure of the FHL regime and state capital allowances can be carried forward against the now standard property business. In the old regime, if an FHL ceased or was sold a balancing charge could arise if the assets on which CAs had been claimed were sold for more than the remaining pool.
I'm probably over thinking this, but I have a client with a large carry forward loss due to claiming capital allowances on fixtures in their first year of their FHL business. They will now combine this one FHL with several long term lets and the new regime states they can carry forward the losses on the combined business. What if 5 years later, when the losses are all used, they decided to sell the FHL. Are the fixtures they claimed the CAs on still liable for a balancing charge, or would it be legitimate to say the fixtures were now depreciated in value and need replaced?
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They're not going to be the same value as they were when purchased, are they?
If that's what you're asking..........
Surely the value of any fixtures after 5 years is £0?
In the accounts, yes. If that's your accounting policy.
Not necessarily true for tax, though. Market value is the mark.
There will be no balancing charges or allowances after April 2025: just WDA if you have a WDV as at 1 or 5/4/25. Thus there will be no need to apportion the selling price of a property between things on which CAs weren't claimed and things that they were claimed. Although agreeing a price for the fittings and moveables to be sold with the property might save CGT.
The alternative, if the facts fit, is to argue that there is a trade.
The client claimed the full spend on fixtures and fittings as capital allowances in the first year of business, so WDV is nil, and the CAs created a large c/f loss. The new leg says the loss can be carried forward but I can't see where it says if you sell that particular property and have claimed CAs on it, that there is no longer a balancing charge/allowance. Can you please point me in the right direction.
Thanks
Does it not depend on the fixtures and useful life expectancy? On a quick read of the draft legislation I had taken it that no Balancing Allowance or Charge on existing FHL going forward into 2025/26 but not clear what happens when that property is sold say in 5 years and is the only property in the property business.
Another thought. As the FHL regime ends on 5 April 2025, all FHL businesses ceases to exist on 5 April 2025, regardless of whether they carry on with short term lets or not, do all FHL businesses now have 3 years to sell up and still be eligible for BADR?
Assuming that the business ceases or before 5 April 2025 (as I assume from your question) then the answer is "Yes". If on or after 6 April 2025, then "No."
The above answers assume that the proposed legislation is enacted. Here is the Policy paper:-
https://www.gov.uk/government/publications/furnished-holiday-lettings-ta...
[Refer to the 9th bullet under the paragraph headed "Proposed revisions"].
Hence of course, consideration should be given (especially if a cessation is being contemplated) to such cessation taking place on or before 5 April 2025 [as ever measuring any potential CGT saving (from such cesation) against the pros and cons of ALL other factors].
Basil.
Thanks for your very detailed response Basil. I had read that bullet point but found it as clear as mud. From your answer can I assume the 'commencement date' is 6 April 2025?
"in relation to business asset disposal relief, where the FHL conditions are satisfied in relation to a business that ceased prior to the commencement date, relief may continue to apply to a disposal that occurs within the normal 3-year period following cessation"
The way I was reading the situation was that as the FHL tax regime ends 5 April, then all FHL businesses technically cease from 5 April 2025 whether still operating as holiday lets, or not. There will be no such thing in tax law as an FHL, therefore, providing they satisfy the 2 years in business clause they have 3 years to sell up in order to qualify for BADR. If they choose to continue the properties as holiday lets, if it's more profitable to do so, they just add the profits/losses to their long term property lets if they have any.
Is your reading of the situation that if they continue as short term lets, say for another 2 years, they cannot make a BADR claim, even though it's within the 3 years of the regime cessation?
Thanks
Tricia
[1] You ask:-
“From your answer can I assume the 'commencement date' is 6 April 2025”.
Yes indeed. The bullet point might have been clearer if it had used the term “Operative date” (as shown earlier in the Policy paper) instead of "commencement date".
[As a separate small point, the operative date/commencement date for companies is 5 days earlier of course, at 1 April 2025].
[2] You ask:-
“Is your reading of the situation that if they continue as short term lets, say for another 2 years, they cannot make a BADR claim, even though it's within the 3 years of the regime cessation?”
Yes indeed again, since “another 2 years from now” is by definition after 1/6 April 2025. Hence:-
(i) FHL business ceases on or before 5 April 2025 (31 March 2025 for companies) -eligible for BADR (assuming all other eligibility rules complied with).
(ii) FHL business ceases after 5 April 2025 (31 March 2025 for companies) - NOT eligible for BADR.
Basil.
Thanks very much for the clarification Basil, I now know how to best advise my clients.
Tricia
I would have thought that if the CAs claimed and written down relate to fixed plant & machinery then a balancing charge can be avoided by agreeing a £2 election under s198 CAA 2001 with the buyer.
For any loose furniture & equipment I believe there would be a balancing charge equal to the value these items are sold for. This amount should be kept separate from the property cost to reduce CGT (and also reduce SDLT for the buyer).
Thanks very much, a great suggestion.
I think this will be realistic so long as a reasonable amount of time has elapsed since any refurbishment was carried out, and furniture over 5 years old tends to be pretty much worthless anyway.
Tricia
Disposal value is market value on cessation. Many capital allowances specialists will have used a just and reasonable apportionment of the original purchase price to justify a figure for the fixtures. Applying the same logic on cessation (assuming the property is worth at least as much now) could, I fear, lead to a large balancing charge.
Especially if AIA has been claimed ...
Thanks for your response.
I would imagine if an FHL has had a lot of use, the fixtures such as kitchens, bathrooms & furniture will wear out after around 4-5 years and need replaced, so would have negligible value. Integral features which take a lot longer to wear out would not depreciate in value so much, but would their market value increase? I think it could be argued they are a similar value to what they cost, or slightly less for wear and tear. If the FHL owner has used AIA and claimed the entire pool then they could be liable for a balancing charge on integral features.
It would be nice to hear from a CA expert on this point.
Anyone?
The point I am making is that capital allowances firms often claimed on a percentage of fixtures when a property is purchased. Say the property cost £100,000 they might claim £20,000 on the kitchen and bathroom fixtures based on a just and reasonable apportionment (reinstatement cost). If the property is now worth £200,000, would HMRC apply the same argument?
Of course, the disposal value can never be higher than the original cost, but that doesn't help if the owner has claimed AIA as they'll have a £20,000 balancing charge.
I agree stuff like furniture and other loose P&M are likely to have a low second hand value.
I see what you mean, thanks for clarifying
I would say a large proportion have used AIA to generate huge carry forward losses and the balancing charge issue will mean they will continue with the letting business as the BC will outweigh the CGT saving
Interesting times
Best wishes
Tricia
If the fixtures have gone up in value, I cannot think of any reason why a balancing charge would not apply; being the difference between the value of fixtures on the disposal date and written down value of the pool. If a property has increased in value, a vendor might be hard pressed to justify that the fixtures have gone down in value.
Furthermore, any decrease in value of fixtures would result in a corresponding increase in value for the remaining part of the property, and therefore greater exposure to CGT. While CGT is currently at lower rates than income tax, that gap in rates might narrow or even close. A change to CGT in the Autumn has been widely speculated about.
Proceed with caution dealing with any promoter of tax avoidance about tax relief on capital allowance before furnished holiday letting is abolished
Thanks for your input, however I don't think fixtures in an S198 election can exceed the amount claimed, therefore they technically do not rise in value.
In the case of someone who purchased the house and converted it to an FHL, after renovating it with new integral features, kitchens etc., the base cost for CGT would be whatever they paid for the house plus the improvement costs, so regardless of the current value of the fixtures, their CGT would be the same.
I wonder what happens to CAs if an FHL owner sells to someone who will continue to use the property as a holiday let. Can the CAs be transferred under the new rules, or are they only available to the current owner against future property income?
I am seeking clarification from HMRC on that matter, Tricia, but as the property from April 2025 will no longer be classified as an FHL it would suggest the buyer would be unable to claim regardless of how they utilise the property.
I'm also looking to confirm if an FHL owner Pre-April 2025 must continue to meet the FHL criteria post-April 2025 to continue writing down the CAs or if they are entitled to continue regardless of occupancy.
I am seeking clarification from HMRC on that matter, Tricia, but as the property from April 2025 will no longer be classified as an FHL it would suggest the buyer would be unable to claim regardless of how they utilise the property.
I'm also looking to confirm if an FHL owner Pre-April 2025 must continue to meet the FHL criteria post-April 2025 to continue writing down the CAs or if they are entitled to continue regardless of occupancy.
I am seeking clarification from HMRC on that matter, Tricia, but as the property from April 2025 will no longer be classified as an FHL it would suggest the buyer would be unable to claim regardless of how they utilise the property.
I'm also looking to confirm if an FHL owner Pre-April 2025 must continue to meet the FHL criteria post-April 2025 to continue writing down the CAs or if they are entitled to continue regardless of occupancy.
Have you looked at the legislation?
I did, but with most legislation it can be unclear and be left open to interpretation. The new FHL draft legislation doesn't appear to offer clarity on many transitional scenarios in my opinion.
I did, but with most legislation it can be unclear and be left open to interpretation. The new FHL draft legislation doesn't appear to offer clarity on many transitional scenarios in my opinion.
...such as?
I agree with you, it's very vague on a lot of issues and it leaves it difficult for us to advise on sell up or keep.
Hopefully the main bodies will be pushing for clarity.
I appreciate your input, thanks
Tricia