In association with
Save content
Have you found this content useful? Use the button above to save it to your profile.
Holiday homes AccountingWEB Jeremy Hunt abolishes the furnished holiday lettings regime
istock_holiday_homes_John_Waite
Brought to you by Allica Bank

Jeremy Hunt abolishes the furnished holiday lettings regime

by

In the Spring Budget, the Chancellor announced that the furnished holiday lettings regime would be abolished from 6 April 2025. 

6th Mar 2024
In association with
Save content
Have you found this content useful? Use the button above to save it to your profile.

The change aims to increase long-term rental options for locals and raise tax receipts to help fund national insurance cuts. It is estimated to raise around £300m from landlords who benefited from the furnished holiday lettings (FHL) scheme.

Properties meeting the qualifying tests for FHLs are taxed under special rules and owners of such properties can access specific tax advantages not available for other lettings, including:

  • Entitlement to plant and machinery allowances on items of fixtures, furniture, furnishings and equipment. The relief also allowed utilisation of the 100% annual investment allowance and, for corporates, the 130% super-deduction or 100% full expensing for expenditure incurred on such items.
  • Capital gains tax (CGT) reliefs for traders such as rollover relief and mitigating CGT on disposal of a property.
  • Finance and interest restrictions did not apply to loans and mortgages on FHL properties.

The new measures will have far-reaching consequences for owners who have let their properties for holiday rental income and met the criteria set out in the FHL regime. It includes those who might own a single holiday home made available for letting or those who let their properties through Airbnb or similar agencies.

The tax reliefs have only been available for properties which meet a number of conditions including:

  • Being let on a commercial basis with the view to the realisation of profit;
  • being in the UK or the European Economic Area;
  • being furnished for normal occupation with visitors entitled to use the furniture; and
  • passing three occupancy conditions relating to the pattern of occupation, how many days it is available for letting in the year and how many days it is actually let for.

If a property meets that criteria, the tax relief in terms of capital allowances (CA) and CGT are quite generous. A typical property costing £500,000 to buy with a £50,000 subsequent refurbishment could generate around £190,000 of expenditure qualifying for CA which could then be used to mitigate tax on rental income. 

If the property is then sold, the owners could either claim rollover relief or avail of business asset disposal relief which attracted a 10% CGT rate on the sale.

What does this mean?

Whilst the aims of the Chancellor in abolishing the regime may have been well intended, there might be some unintended consequences that have not been fully considered. 

In particular, with the cliff edge abolition date of 6 April 2025 on the horizon, will this prompt a rush to sell such properties to capitalize on the 10% CGT benefits, previously thought as to be one of the main attractions of the scheme?

In addition, the removal of the FHL criteria as to what constitutes an FHL property may cause uncertainty on whether or not the taxpayer was conducting a property trade in respect of the property in question, an issue that was prevalent before the introduction of the FHL regime in the first place. 

Also, the tax benefit to the Exchequer might be lower than expected because some owners may look to switch their activity to a trade of serviced accommodation. While theoretically eligible for CA, this strategy could pose risks and be subject to HMRC challenges if the owner does not retain occupancy, control of the premises or provide sufficient services to qualify as a trade.

Finally, our experience has been that owners of FHL qualifying properties do not usually claim their full entitlement to plant and machinery allowances on the fittings, fixtures and furnishings within the property. 

With the clock ticking down to the abolition of the regime, it would be prudent for all those who feel that they might benefit from carrying out a retrospective review of historic expenditure to do that as soon as possible. Such an exercise could even lead to repayments of overpaid tax relating to prior periods of expenditure. 

 

AccountingWeb Spring Budget 2024 is sponsored by Allica Bank.

Allica Bank provides no-nonsense banking for established businesses. We combine human
relationships and digital technology to provide British businesses with the banking they deserve.
Working with accountants on the same side of the table, we help find collaborative solutions to SME
issues, helping businesses to grow and succeed.

Visit our website to learn how Allica Bank can support you and your clients

 

Replies (28)

Please login or register to join the discussion.

avatar
By richard thomas
06th Mar 2024 17:12

I hope that there is not a further consequence of abolition, intended or not. I like many people had been making modest profits over the years until Covid when for the two years 20-21 and 21-22 rents letting and rents fell through the floor and I had to rely on the period of grace elections.

I took the opportunity in this period to have some major refurbishing done so that for 20-21 I had a large loss which I carried forward against the tiny profit made in 21-22 and then against the normal level of profit I made in 22-23 thanks to the market recovering. But there is still a sizeable loss to carry forward to 23-24 which will not by any means exhaust what I expect to be this year's profit.

If there is still a loss to c/f on abolition I sincerely hope that I and others in the same position will be able to set the loss off against overseas property business profits.

Incidentally why is the fact that many people underclaim capital allowances an unintended consequence of abolition?

Thanks (0)
Replying to richard thomas:
avatar
By More unearned luck
06th Mar 2024 18:02

I assume that you have similar hopes for owners of UK FHLs.

Thanks (1)
Replying to More unearned luck:
avatar
By richard thomas
06th Mar 2024 18:20

Indeed I do.

Thanks (0)
By SteveHa
06th Mar 2024 17:18

Let's not forget the increase in Air Passenger Duty, and so coupled with the abolition of FHL status, is likely to go someway towards killing tourism within, and from the UK.

Thanks (1)
avatar
By norstar
06th Mar 2024 17:52

I'm not quite sure that this measure actually achieves anything. Anyone with a qualifying property and who have interest to relieve, can incorporate the business. Anyone looking at buying a new property can buy through a Ltd company and again, deduct loan interest etc.

Again, an unfair measure as those with a property already will not only lose the tax advantage, but will undoubtedly be clobbered by rates increases as well. Who'd be a capitalist with a socialist Tory party in charge eh?

Thanks (0)
Replying to norstar:
paddle steamer
By DJKL
06th Mar 2024 17:57

They lose the CGT benefit/washing ability.

Thanks (0)
Replying to norstar:
avatar
By justsotax
07th Mar 2024 14:39

yeah imgine voting tory for the last 14 yeard only to find out what many of us already know .... they only care for their own .....

Thanks (0)
avatar
By FactChecker
06th Mar 2024 17:53

What happened/changed? Did the Chancellor's friends tell him that they'd supped too long at that pool and wanted to move on (particularly now that it was becoming commonplace amongst the less exalted - with apologies to Richard who moves in spheres they wouldn't recognise)?

Irrespective of whether one sees this as good or bad news (for the country or personally), it's difficult to see what has driven such a radical change. Do they really believe this will unlock housing stock - or is it just another spoiling tactic to limit the options for their replacements when they arrive?

Thanks (4)
Replying to FactChecker:
paddle steamer
By DJKL
06th Mar 2024 18:06

Its for votes- housing purchase costs , rental costs, affordability is now a really big issue.

With Edinburgh two bed tenement flats in Leith up at £1,500 or more a month re rental getting these pushed back into the private rental sector is imperative re supply side.

When you are say a civil servant on maybe £37,000 pa your take home post tax, NI and Student loan and pension contribution, makes renting at that cost pretty tricky.

In addition we are getting AirBnB ghettos, entire new build blocks full of AirBnB flats, few residents.

Personal view, they blight a toursist city, they blight young people's lives, they blight parents lives having their children hanging around at home until 30 or more scrabbling to save to buy, they are not a societal good - all IMHO.

Thanks (13)
Replying to DJKL:
avatar
By FactChecker
06th Mar 2024 20:43

So a vote for "unlock housing stock" - which I understand (both the need and the possible but less certain outcome).

I'm in teasing mode, but whenever I see respected members arguing strongly from the perspective of personal impact - and in this case from opposite ends of the spectrum (you can shake hands with Richard later) - I'm inclined to a feeling that the current status is distorting the market.
Which doesn't automatically mean that the solution is to banish the framework ... more that the need to 'beware of unintended consequences' has raised high its flag!

Thanks (3)
Replying to FactChecker:
paddle steamer
By DJKL
07th Mar 2024 15:24

No idea re supply side impact, may be none, but at least for Conservatives it signals to all those trying to rent or buy that the Conservatives are pretending to be just like us with their world view, they are trying to show they care.

I have no issue with landlords renting out flats for people to live in but I do have an issue with holiday business arrangements with properties not designed for that purpose- there are in Edinburgh some purpose built conversions, fire systems, automatic sprinklers, proper fire exits re upper floors etc, fair enough, good luck to them, but effectively creating a B & B (usually without the second B) with no look at what would be required with planning and building control were it say a hotel is an unfair playing field for the more traditional hospitality industry.

It is not just myself with this view, quite a lot of people working in the property industry up here (though these days we are commercial not residential) take a similar view- AirBnB needs heavily regulated.

Thanks (3)
Replying to DJKL:
avatar
By FactChecker
07th Mar 2024 19:51

Who said 'there is nothing new under the sun' + 'what goes around comes around':

"the unpleasant and unacceptable face of capitalism" has been adopted by AirBnB.

Thanks (2)
Replying to DJKL:
Chris M
By mr. mischief
07th Mar 2024 10:07

Ditto here in the Lake District. Good riddance FHL!

Thanks (0)
avatar
By GHarr497688
06th Mar 2024 18:48

If some one has a block of flats that are let out to holiday makers are they going to lose the normal trading status. If this is the case surely they will sell and then the number of tourists to area for holidays will reduce and affect local business. I live in such an area.

Thanks (1)
Replying to GHarr497688:
avatar
By justsotax
07th Mar 2024 14:41

busy in the winter......?

Thanks (0)
Replying to GHarr497688:
avatar
By bendybod
08th Mar 2024 10:19

There have to be locals to provide the services to the tourists though. When hotels can't get staff because the staff can't find accommodation in the area, something has gone too far!
I too live in a coastal area with an increasing amount of tourism and in a town too large for it to become a major issue. However, equally, I have family members who do live in towns where it is dead in winter and over-run in the summer. Other local businesses cannot survive easily on those terms.

Thanks (0)
avatar
By SPHAccounting
06th Mar 2024 22:25

Does anybody know what this means?

“Draft legislation will be published in due course and include an anti forestalling rule. This will prevent the obtaining of a tax advantage through the use of unconditional contracts to obtain capital gains tax relief under the current FHL rules. This rule will apply from 6 March 2024”

I understand what an unconditional contract is, but why would parties agree to one in the sale of an FHL?
Can clients still sell up and claim BADR?
Is this to stop washing out via a sale to a company?

Thanks (1)
Replying to SPHAccounting:
avatar
By cohen
08th Mar 2024 12:42

I read that as stopping people from doing this:
https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg64172

Genuine sales pre 06/04/25 should still be eligible for BADR, I would hope.

Thanks (0)
avatar
By HL86
06th Mar 2024 22:46

It will be interesting to see if FHLs will still be within the scope of VAT when this all comes out.

Thanks (0)
Replying to HL86:
Ivor Windybottom
By Ivor Windybottom
07th Mar 2024 08:56

Interesting point, although VAT has always been determined on a separate basis so there is no need for VAT to be touched, but it will make spotting missing VAT registrations slightly harder. Perhaps the SA Tax Return could be changed to include a tick box to say "Can you see the sea?"

Thanks (3)
Replying to Ivor Windybottom:
avatar
By lukeoliver
07th Mar 2024 11:08

I think they may have overlooked the VAT issue. Difficult to see how they could say FHL are Vatable but not a business but who knows!

May be a bit of an own goal in that the potential VAT may significantly offset the additional income tax revenue, especially as FHL always had favourably NIC treatment.

the FHL trade does bring in a lot of revenue to the local economy in areas like where I live on the sunny south coast.

Fundamentally we have a very disjointed Housing system, from planning policy to a trades skills shortage etc and this is unlikely to scratch the surface

Thanks (1)
Replying to lukeoliver:
avatar
By richard thomas
08th Mar 2024 09:48

I don't see why you think VAT has been overlooked - it has its own rules for the exemption for land in para (e) Item 1 Group 1 VATA 94, which excludes the grant of any interest in, right over or licence to occupy "holiday accommodation" from the exemption. That is a far wider set of transactions than letting out what happens to qualify for the income or corporation tax benefits of the FHL direct tax regime, and abolition of those IT & CT benefits hardly changes the policy imperative of the exemptions in Group 1.

And nobody is saying or has said that letting what is currently qualifying FHL will not still be a business for IT & CT after repeal of the FHL regime, even if that had any bearing on the VAT treatment.

Thanks (0)
Replying to Ivor Windybottom:
avatar
By lukeoliver
07th Mar 2024 11:09

a

Thanks (0)
Replying to Ivor Windybottom:
avatar
By lukeoliver
07th Mar 2024 11:09

a

Thanks (0)
avatar
By Malcolm Veall
07th Mar 2024 10:09

The real problem is the assumption that the tax treatments will change behaviour - clients don't say: I might buy an FHL if the tax benefits exist" they say: "I am buying a holiday let - how does the tax work" - it is unlikely to free up much by way of affordable accom for local people. (eg in Cornwall where I am from)

Thanks (2)
Replying to Malcolm Veall:
paddle steamer
By DJKL
07th Mar 2024 15:33

Not in tourist cities they do not- they say, I have a flat, lets operate it as a FHL (So in Edinburgh a lot pf previously let flats were taken from that market and moved to FHL), if right location it takes in more money- so a flat which as a permanent flat might take £15,000 pa less costs now takes £25,000 less costs, of course the latter costs may be really high if work all outsourced (linen changes/letting costs/cleaning etc) but maybe it makes more net profit which is worthwhile, but where borderline the 100% interest set off at HR for the FHL and the 10% CGT rate after 2 years (washing out the earlier gains pre being a FHL) might have made it worth all the extra work-in these cases the changes may in a few cases have changed the risk(effort)/reward equation.

Thanks (1)
Replying to DJKL:
avatar
By Payroll Pete
10th Apr 2024 09:51

I've seen a consistent shift from BTL to FHL since the S24 restrictions came in, and punters definitely aware of the mortgage interest benefits and a lot directing purchases to ensure capital allowances were avaialable.

It has definitely been seen as a more tax efficient investment in the past few years

Thanks (0)
avatar
By sherodwilliams
08th Mar 2024 14:34

Sadly this Budget has provided sufficient scope for Boots Pharmacy to make a small yet taxable fortune - On the sale of washable sticking plaster. It seems as though for the last 20 years or so we have seen measures introduced by numerous Chancellors , each of which has been little more than a sticking plaster over one cut or sore, without any attempt whatsoever at looking at the real cause & effect. As accountants we all recognise that if income from taxation ( in its widest context) is not sufficient tp cover expenditure then we are at the top of the slippery helter skelter but yet we still have a determination to drive down taxes yet increase spending year on year.Surely anyone with a modicum of common sense would have seen that if corporates and High net worth individuals could buy up housing stock en masse then the effect upon local regions as mentioned in other comments would be adverse. The FHL environment is full of landlords many of whom probably complete tax returns without any care for the rules yet they care little. I feel so happy that the pensions Lifetime allowance was scrapped last year because the Government want everyone to save for their future in retirement. Contributions however were effectively capped ( just up to £60k pa) for those who could afford it preventing some from getting close to the LA because they cannot afford it in early years. Of course - I almost forgot those in the higher ranks of the Civil Service who benefit from Non Contributory schemes amassing large funds. We shall soon be doing a Dennis Healey & running off to borrow from the IMF !

Thanks (1)