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A holiday let | AccountingWEB | Uncertainty clouds future of furnished holiday lettings
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Uncertainty clouds future of abolished furnished holiday lettings regime

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Since the Spring Budget abolished the furnished holiday lettings regime, detailed guidance has been sparse, and the upcoming general election has only added more uncertainty. Paul Aplin explores the future of the FHL regime and its impact on taxpayers if abolition happens.

24th May 2024
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The announcement in the March Budget that the furnished holiday lettings (FHL) regime was to be abolished from April 2025 surprised many (though how surprised you were perhaps depended on which newspaper you read).

What surprised me was the lack of practical detail surrounding the announcement.

What we know

All we had on the day was a brief paragraph in the Overview of Tax Legislation and Rates (OOTLAR) saying: “The government will abolish the Furnished Holiday Lettings tax regime, eliminating the tax advantage for landlords who let out short-term furnished holiday properties over those who let out residential properties to longer-term tenants. This will take effect from April 2025.

“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 relief under the current FHL rules. This rule will apply from 6 March 2024.”

The measure was not included in the Finance Bill and two months after the Budget we are still no wiser as to what the anti-forestalling rule will be.

Various professional and trade bodies have made representations and there was a brief Westminster Hall debate on 1 May. No formal consultation is planned.

This is not the first time that the FHL tax regime has faced the death sentence, and before it happens – if it happens - taxpayers deserve fair warning so that they can plan sensibly.

Part of the landscape

MPs who spoke in the Westminster Hall debate naturally highlighted issues in their own constituencies. In many, holiday accommodation is a key part of the local economy; in others holiday properties and second homes reduce the available residential housing stock for local people.

I live on the Somerset Levels and on a two-mile dog walk the morning after the Budget I counted three holiday letting properties, all attached to farms. Given the risk of flooding on the Levels, the pressure to diversify is significant and holiday lettings have proved to be an attractive means of doing this. For some farmers, holidaymakers have become a reliable annual crop.

The loss of relief for interest at all rates in this “levelling up” will be a blow for many. I am more concerned though about the CGT aspects. In some instances, owners will have been expecting to obtain Business Asset Disposal Relief (BADR) on any disposal. In others, they may have been contemplating hold over relief or roll over relief.

They now face uncertainty over whether the FHL regime will in fact be abolished after the general election, if so when, what the anti-forestalling rule will actually try to forestall and what if any action to take. They might also be wondering about future CGT rates.

I suspect many FHL properties will have been financed in part by rolling over gains on the disposal of farmland. While those rolled-over gains will only crystallise on disposal of the property (not on the ending of the FHL regime), in some cases they will be substantial. There will also be capital allowances balancing charges in some cases (and as the CIOT pointed out in its representation, these would be “dry” charges).

The whole thing feels very last minute. It is a hugely unsatisfactory situation.

Westminster Hall

Some points from the Westminster Hall debate are worth noting. The Professional Association of Self-Caterers estimates that 197,000 properties in the UK fall within the regime (the Office of Tax Simplification – OTS - gave a lower figure in its Property Income Report in 2020) and that 39% of those properties can only be used for holiday purposes due to planning restrictions.

It is not, therefore, the case that all FHL properties could be released on to the residential property market (and as at least one MP pointed out, even if they could they would not necessarily be affordable by local people).

While several MPs questioned the evidence for suggesting that FHL tax relief has a disproportionate effect on house prices, the Financial Secretary to the Treasury asserted that there was broad recognition that the current system is contributing to some distortions and cited his experience as tourism minister. He confirmed that there are no plans for a formal consultation. A key aim, he said, is simplification.

Simplification

The OTS in its Property Income Review published in November 2022 explored the question of abolishing the FHL regime. If the government decided to do so, the OTS suggested a “brightline” test should be introduced to make the boundary between trading and investment clearer.

Possible factors in such a test could include the number of properties let, that the letting is short term rather than long term, no personal use and distinguishing cases where there is a profit motive from those where the motive is long term investment.  

In response to a question from ICAEW, HMRC recently confirmed that the idea of a brightline test has been rejected. The letter promises that “the details of how the transition from furnished holiday lettings will operate will be set out in draft legislation and accompanying documentation to be published soon.”

When “soon” will be given the calling of the election is anyone’s guess.   

The rejection of a brightline test is disappointing and leaves us with the familiar trail of cases on trading versus property investment.

Before you go

At this point, we have the worst of all possible worlds for taxpayers: an announcement that a tax regime many have relied on is to be withdrawn, with no draft legislation, no indication of any transitional measures and the threat of an anti-forestalling measure without revealing what it will actually forestall. That is tantamount to saying “we are going to render something that you might do ineffective, but we are not going to tell you what it is”.

As the CIOT representation puts it, “As a general point it is obviously difficult for taxpayers to comply with provisions in force that have not been published and such an approach seems contrary to the Charter commitment to help taxpayers meet their tax responsibilities”. I couldn’t agree more.

Before any further announcement is made, I think a re-reading of the OTS paper would be wise. Its analysis of the issues was based on wide consultation and its conclusions were both thorough and clear. And clarity, above everything, is what we need.

Replies (15)

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By FactChecker
24th May 2024 19:51

Whilst I agree that announcing the withdrawal of a tax regime without providing details of any transitional provisions or of the anti-forestalling rules is frankly incompetent, the fallout is to a large extent wholly predictable as soon as any such tax regime is introduced in the first place.
It's a bit like those politicians & generals who happily omit any 'exit' plan when roaring off to war ... it used to be known as planning or looking more than one step ahead at a time.

Of course any major change in taxation will have losers - some of them justifiably feeling unfairly treated - but there are no certainties in life; and if you go chasing special dispensations you should be prepared to live with the consequences (whether good or bad at future points in time).

It may well be in your locality "for some farmers, holidaymakers have become a reliable annual crop" - typically but not always via the FHL scheme - but that doesn't make them a substantial constituency amongst UK taxpayers.
At a different level, some businesses took govt advice (and sweeteners) to buy diesel transport not that long ago ... and have been penalised ever since (for good reasons but still unfair).

Personally I feel that if farmers need to diversify that badly then the agricultural sector needs a root and branch restructuring (very much including subsidies and taxation) ... but protecting FHL (that by definition is not core to their business) is like interfering in Retail because people have chosen (rightly or wrongly) to transfer most of their purchasing away from bricks'n'mortar.

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Replying to FactChecker:
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By colinstewart
28th May 2024 11:22

I think you need to check your facts... and focus on the issue in hand perhaps?

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Replying to colinstewart:
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By FactChecker
28th May 2024 14:21

"I think you need to check your facts" - which facts are you disputing?
"... and focus on the issue in hand perhaps?" - which, aside of what I wrote, is what?

None of this made sense until I found your lengthy post (nearly called it a moan but to be fair you have declared your personal investment and thus 1 person's perspective) on 28th May 2024 11:18 (below).

Aside of the interesting illustration of examples where bad decisions were made in the past (we all make those), your conclusion was clear:
"Well the answer is that the FHL regime should be abolished, the Chancellor should have come to the despatch box with the plan and had the decency to let people know what he wanted to do and got on with it."
However I don't see how that differs from what I said (I called the lack of detail 'incompetent') - so were you just reacting to a few digs I made at how people, in general, expect too much 'certainty' in an uncertain world?

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By GHarr497688
27th May 2024 13:02

How can anyone plan without the detail ? Is it just a way to win votes.

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Replying to GHarr497688:
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By farrcorfe
29th May 2024 09:36

Well, they just lost mine. Why does the State hate landlords?

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By Marlinman
28th May 2024 09:20

It all looked very straightforward until somebody came up with antiforestalling which wasn't even mentioned in the chancellor's speech. I now have a client who heard about it on a You Tube video and doesn't know what to do and I can't advise him until the legislation is published.

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By anotheruser123
28th May 2024 10:11

Holiday lets attached to farms are in a different category to others for a couple of reasons. The first is that they are part and parcel of the estate and not “stand alone” properties with their own title. They are empty and thus available now because working practices have become automated and you simply don’t need tied housing for lots of labourers these days.

As part of the farm they will likely have phase 3 electricity and not an individual supply. This is far more expensive than a domestic supply because it has to run large motors. You might be running a grain dryer or a milking parlour.

As usual politicians make announcements without first ascertaining the feasibility of what seems like a good idea. Another mess that has made with housing concerns student lets. Students typically want to rent from October until May and pay rent for that period, the empty properties are then let to tourists in the summertime. It suits all parties, but no the proposals in the Renter’s Reform Bill did not take that into consideration – thankfully that bill is no more and the next government will need to start from scratch.

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By colinstewart
28th May 2024 11:18

In addition to running a practice my partner and I also have three holiday lets on our 5 acre small holding in Cornwall.
The facts of the matter are that the core of the industry which have been around for years using lettings which are never going to end up as housing stock are on their knees trying to earn a living. These businesses have owners on site and provide many additional support services to guests (including listening to their life stories!!). The root of the problem is that there is a growing mass of discreet properties in coastal towns and villages which are being let through online travel agents (Airbnb being just one). A coastal house can easily gross £50,000 a year - I have that client. So there is a big difference in properties comprising the industry.
By way of an example: four years ago we invested £14,000 in preparing a site and services and buying a hot tub - it was the latest craze! It was really successful until the new regulations came in! twice daily testing and change the water after each set of guests had used it! The whole thing is now scrap as we cannot achieve that goal - heating 1500 litres of water to 36c cannot be done in the time of a changeover.
However, back in the days of pink partnership tax returns FHL was taxed under Schedule D case 6 (other trading income) and the FHL regime was introduced because they wanted to restrict the benefits of the full trading regime from it. So it was a set of Schedule D restrictions rather than a set of Schedule A allowances which it is now touted as.
Where do we go from here? Well the answer is that the FHL regime should be abolished, the Chancellor should have come to the despatch box with the plan and had the decency to let people know what he wanted to do and got on with it. FHL should be withdrawn mainly because those who just let out a house on the coast do little or nothing to run the 'business' - it isn't the same as the multiple property lettings where the owner also resides - and works almost full time! Those trades can easily adapt, i.e. they don't really need the FHL regime anyway - just go back to the principles of D case 6. We have that plan in place already and may well move to it as it makes good business sense.
Meanwhile, we will continue to welcome our guests and help them enjoy a good break in Cornwall. Just Google Rosewyn, anyone for Breakfast ?

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Replying to colinstewart:
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By Pam Moreland
29th May 2024 08:50

Don't you think this was just a good headline grabber? Nasty landlords raking it in and locals who would like to be able to rent a property in a rural area where they live and work being excluded. Perhaps this is why we have no details on the implications.
It is quite obvious that the reality is very different and owners of furnished holiday lets are as diverse as the rest of the population.
I live in a semi rural area in the south of England. Our young cannot afford to rent let alone buy houses on their wages and that is nothing to do with Airbnb etc.

Sick of sound bites and this will be worse in the build up to the election.

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By charlotte white
28th May 2024 11:55

I met the HMRC speaker on your stand at the NEC. He very kindly gave me his direct email address and has been very obliging and helpful since. One of the topics I was covering is "FHL". It goes without saying that "Holiday lets" are not just cottages or barns or houses. The definition of a "residential let" is a real head scratcher for me. So let's take the example of pods, lodges, mobile homes, tree houses, canvas tent structures. These are sited on designated holiday parks. Will never be a residential property. Ever! So the argument to create more living accommodation for locals is not relevant, as was first suggested when the rumours were rumbling. Commercial loans are taken out to fund these projects and most wont break into profit for at least 10 years. Its a depreciating asset. A large element is obviously the site fees, interest, changeover costs, bedding, utilities, maintenance, welcome packs, travel the list goes on. Yet some of these costs are never recognised as a tax deductible expense in a residential as they are just not applicable!! Not to mention the outlay of the furniture, hot tub etc. I have been liaising with a HMRC specialist in the FHL sector, and to be honest they just don't have any answers. Vague is an understatement. We have a number of FHL clients, either this is their core business, or additional to the usual HR income.

I am certainly at loss and frankly quite concerned about this drastic change to what can only ever be a holiday let with the long list of costs attached. Interestingly guest house B&Bs are excluded (which could obviously become a residential conversion). So does a holiday let need to offer breakfast to meet the criteria of a "service". One of the areas to look at is if it is classed as a trade. In which case it would not be a holiday let and not applicable to this new legislation. Self employment on the tax return. Will the existing FHL rules carry through in any way, ie the qualifying days.

Transferring the business into a limited company is one of the options. Ignoring the tax side of this and looking at the practicality, many of these HL's on holiday parks have loans in personal names. You would have to change the ownership with the site, (and there are legal contract documents to be drawn to do this), and then obtain a replacement loan in the name of the Limited company. The rates on the "depreciating assets" loans are always much higher than on a residential property, and the rates are now likely 3-4 times higher than they were a couple of years ago. Guests think HL are a quick buck business. They require substantial investment into the business, with very high operating and running costs. Unlike a residential let.

If anyone has any comments it would be greatly appreciated. Thank you

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Replying to charlotte white:
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By colinstewart
28th May 2024 12:33

An excellent synopsis of the situation. what you are probably missing is the real reason why the abolition is needed - Council tax probably at 200% and Tourist tax. Local government is desparate for more money.
Breakfast is actually a very good point: how many hotels only offer breakfast as an option. The new B&B is bed a basket ...
I think you will find that most of the larger holiday letting operations are already companies and like us have employees. Of course there is FHL under Corporation tax so that in itself doesn't help, but 'Necessity is the mother of invention' and business people are extremely resourceful and capable of reacting to change. So I still feel on balance that FHL should be abolished because It won't affect the core industry. As for Residential Lettings - Tenants (Reform) Bill - that'll make you cry!! and it is the driving force behind the FHL expansion...

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Replying to colinstewart:
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By charlotte white
28th May 2024 22:39

Evening Colin. Thanks for taking the time out for writing the reply. Very valid point on the Council Tax which HMRC as you say have already put rumours about to rise for holiday lets. I somewhat agree to the different rate of council tax to be brought in for "lets". Residential properties occupied by residents (I will refer to as bricks and mortar) are currently charged the same rate (I believe) as those let out as a business. However, holiday parks, which are a large proportion of FHL's nowadays, already pay very high rates in their site fees, which can be hefty depending on the area, and popularity of that holiday destination. The rates are billed to and paid over by the park owners, and recharged accordingly. The park owners are actually "making" on this too. Without a shadow of a doubt. Unlike utilities where their hands are effectively tied to prevent them profiting, through Ofgem. I do feel depreciating assets (which are not residential properties or ever have been), are being thrown into the same pot of rules as those that are appreciating assets. The two businesses (residential lets and holiday lets), are just not the same beast! I believe Sykes have already started their own campaign with HMRC, saying these changes will not only kill the market (as it wont be viable to operate), or the prices will have to go up. Effectively the tax payer paying more for their staycations. Sykes also feel it is an unfair advantage to allow a B&B to continue as a trade. Providing breakfast, in the accommodation (a cold continental breakfast would suffice) or include in price to have it at the site restaurant, could be the loop hole / answer. Watch this space.... that's all we can do!

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Replying to charlotte white:
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By colinstewart
29th May 2024 10:29

Morning Charlotte, Breakfast - it's going to be the most important meal of the day :).
The principal issue is that there is no legal definition of 'Furnished Holiday Letting' that meets the current industry. Whilst HS253 tells us how to deal with an FHL, s32 Equalities Act (it is relevant!) refers to 'short stays by people who live elsewhere', and the Valuation Office (HMRC) refer to 'self catering accommodation and premises' one the valuation entry.
One of the major attractors to landlords quite rightly concerned about the Tenants (Reform) Bill is that once they get their 70 days in they can apply to the VOA for an NNDR listing which will most likely give them 100% SBR relief and possibly rural rates relief. We get SBR on one and Rural on the others. I think it works out a £156 per year for the two one bed apartments. The Council Tax equivalent would be over £2k and if I got fed up and retired thus leaving them empty the full Council tax for all of our home and lettings would be over £12,000 a year!
I can't quite get my head around the principle of FHL applying to holiday parks because given the very nature of them I would have expected them to be a full on trade. I used to do a camp site accounts with statics and treated it all as a D case 1 trade - sorry I've been doing this for 49 years and still have my head stuck in the schedular system of taxation :). However I do agree with you in relation to the business rates that apply in these cases. In the cases of single houses being used as FHLs the VOA are very hot on issuing VO6048s to get the evidence that the conditions for NNDR still subsist. Believe it, or not, some people make false claims!
There is definitely the need for a forum on the way forward...

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paddle steamer
By DJKL
29th May 2024 15:09

Re comments re Council Tax, surely if an say holiday let property, rates ought to apply? (which with SBRR might be a saving)

You all on this thread seem to concentrate on rural, what about cities?

Edinburgh has a vast swathe of FHL properties, mainly sucked out of the more normal residential letting supply, in fact on the radio this morning they were discussing the prospective new tourist tax and it was commented that given Edinburgh tourist demand (apparently the strongest holiday occupancy rates in the UK) any levy would have no impact- whilst we do have licensing re AirBnB the fact is that market is significantly hitting the residential market supply.

I am sitting with a 30 year old graduate/postgraduate civil servant back living at home attempting with her other half to leap into home ownership at £350k-£400k for a 2 bed flat, however with low supply, mortgages only available as a percentage of Home Report values and deposit and sums over the Home report value having to be met from own funds, unless mum or dad forks up a decent amount, getting up the housing ladder is tricky , right now few flats even available and the ones they have been chasing they get blown out of water (last year chased one at o/o £295, bid £346, no joy, outbid.)

Will these tax changes alter things, probably not, but frankly I would be hitting FHL properties with all sorts of safety requirements (fire alarms/sprinklers) to level the playing field with hotels etc and maybe persuading some flats back to what they were built to do- house people.

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Replying to DJKL:
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By colinstewart
29th May 2024 15:31

I talk about rural because that is where I am and it is what I know.

Does FHL affect the housing market or does the inward movement of 1.2 million immigrants have anything to do with it. There is a suggestion that ULEZ is driving people out of London! The other issue (certainly in Cornwall) is that typical FHLs aren't affordable for first time buyers and those that are aint suitable for FHLs!

We don't (yet) have tourist tax in England but it will happen.

I agree that the FHL tax framework should be abolished for reason I have already mentioned.

I do need to pick you up on a few things though:
We have to comply with s156 Fire Safety Act, it came in last year.
FHL's are entitled to apply for non domestic rating via the VOA if they meet certain conditions, and if they do they could well be wholly exempt from paying anything.

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