Furnished holiday lets (FHLs) play a significant role in many tourism ventures. They receive beneficial tax treatment if they meet specific criteria, such as being available and occupied by paying guests.
The advantages of FHLs include tax reliefs like capital gains tax (CGT) and potential inheritance tax (IHT) reliefs.
Additionally, there are benefits such as capital allowances, advantages for pension contributions, and the ability to offset finance costs against business income.
The government's reasoning behind this change is to increase the availability of rental properties and open market accommodation for local residents.
Although the Budget announced the abolition of this regime effective from April 2025, this change is not included in the subsequent Finance Bill. It is possible that there will be a consultation, secondary legislation, or the change might be introduced in a future Finance Bill.
This raises questions about the timing, including whether the government can implement this before the general election and if the change will persist post-election. There is also a possibility that the plans could be altered.
Nevertheless, the potential loss of FHL status requires careful consideration and planning, as advised by Rachael Ball, Tax Director at LHP Accountants.
"What is an FHL?"
A furnished holiday let (FHL) is defined by statute.
To be eligible, the property needs to satisfy the following criteria:
Available for commercial holiday letting for a minimum of 210 days (30 weeks) annually.
Not rented by one guest for more than 31 consecutive days or for over 155 days (22 weeks) in a year, typically a tax year.
The property must be commercially let for at least 105 days (15 weeks) per year. In cases of multiple furnished holiday lettings, an averaging or period of grace election can be utilised to meet this requirement.
Actively market and promote the property.
Located in the UK or the European Economic Area, furnished appropriately for daily use.
WHAT ARE THE IMPLICATIONS OF THE PROPOSED FHL TAX CHANGES?
Proposed adjustments to tax regulations for Furnished Holiday Lets (FHLs) starting on April 6, 2025.
From April 6, 2025, Furnished Holiday Lets (FHLs) will no longer qualify for Business Asset Disposal Relief (BADR) on capital gains tax (CGT). Under the new regulations, CGT on eligible capital gains from selling or transferring an FHL will be limited to a 10% rate, with an individual lifetime allowance of £1 million. This change could potentially save couples without other qualifying assets up to £280,000 in CGT.
Gift holdover relief for Furnished Holiday Lettings (FHLs) will no longer be available, affecting individuals considering changing businesses, retiring, or transferring assets to successors, which could result in tax consequences.
Starting from April 6, 2025, FHL sales will be subjected to standard residential property CGT rates, which are fixed at 18% for basic rate taxpayers and 24% for higher rate taxpayers.
Finance costs such as mortgage interest will no longer be deductible when calculating taxable profits for FHLs. Tax relief for finance costs will now adhere to the regulations for typical residential let properties, enabling tax reduction at the basic rate.
Furnished holiday accommodation businesses will lose the ability to claim capital allowances for plant and machinery, furniture, and white goods in their properties.
The government intends to exclude FHL profits from being deemed as net relevant earnings for pension contributions, potentially restricting individual contribution amounts.
Options to consider:
Certain second homeowners might opt for holiday lets even if tax advantages are removed.
Compare the options of long term let against holiday let to compare profits, also bearing in mind that a long term let is less demanding than a holiday let.
Possibly selling the property and either claiming business assets disposal relief and paying capital gains tax at 10% or rolling over the gain into a trading asset.
Light at the end of the tunnel?
In 2022, an Office of Tax Simplification report recommended a "Brightline" test to distinguish between holiday letting activities as a trade or a second home.
The proposal included specific criteria:
Minimum number of properties
Limited to short-term lets only
Exclusion of personal use
Owner's time commitment to management and services provided.
This situation commonly pertains to holiday accommodations that may grow into larger tourist ventures.
It opens the possibility for the government to extend business reliefs and allowances to actively trading holiday accommodations.
In conclusion, the time to take action is now. Speak to your local team today.
Carmarthen Branch Llys Deri, Parc Pensarn, Carmarthen, SA31 2NF
01267 237534 | carmarthen@lhp.co.uk
Haverfordwest Branch 1st Floor Agriculture House, Winch Lane, Haverfordwest, SA61 1R 01437 766749 | haverfordwest@lhp.co.uk
Lampeter Branch Tŷ Harford, Sgwâr Harford, Llambed. SA48 7HD
01570 422204 | lampeter@lhp.co.uk
Tenby Branch Barclays Bank Chambers, 18 High Street, Tenby, SA70 7HD
01834 844743 | tenby@lhp.co.uk
Aberaeron Branch 1 North Road, Aberaeron, Ceredigion SA46 OJD
01545 570401 | Aberaeron@lhp.co.uk
Cross Hands Branch Suite 3 & 6, Block B, Llys Y Barcud, Cross Hands, Llanelli, SA14 6RX 01269 834877 | crosshands@lhp.co.uk
Aberystwyth Branch Aberystwyth Innovation & Enterprise Campus, Gogerddan, Aberystwyth, Ceredigion SY23 3EE
01970 601188 | Aberystwyth@lhp.co.uk
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