HMRC has published a draft legislation explaining how the abolition of the special tax rules for furnished holiday lettings (FHLs) will work.
Your Guide To The Abolished FHL Tax Regime
The favourable tax treatment previously given to FHLs will be abolished from the 1st of April 2025 for Corporation Tax and the 6th of April 2025 for Income Tax. From then on, income from FHLs will be treated in line with all other property income to promote fairness and align tax rules between FHLs and other property businesses.
What Does The Abolishment Mean?
With the FHL tax regime, income and gains from an FHL will be treated in line with all other property income and gains, meaning that:
- Finance cost relief will be restricted to basic rate for income tax.
- Profits from FHLs will not be included in relevant UK earnings when calculating maximum pension relief.
- Special reliefs from Capital Gains Tax (CGT), including roll-over relief, business asset disposal relief (BADR) and gift relief, will no longer be available.
- The capital allowances rules for new furniture and equipment expenditure will be removed, and relief will be available instead to replace domestic items in certain circumstances.
Where an existing FHL business has an ongoing capital allowances pool of expenditure, it can continue to claim writing-down allowances on that pool.
Transitional Measures
Under the existing regime, losses from FHLs can only be offset against future FHL profits. Transitional rules will allow these losses to be carried forward and offset against future profits from the taxpayer’s overall UK or overseas property business.
Transitional measures will also apply to CGT reliefs. However, to prevent owners of existing FHLs from using unconditional contracts to side-step the changes, anti-forestalling measures will apply from the 6th of March 2024.
Jointly Owned Properties
Joint owners of property will no longer be able to choose how to split the profits from an FHL business. Instead, they will be required to report the profits on a 50:50 basis in line with the rules applicable to property rental businesses. It may be possible to alter this split in certain circumstances, for example, if you can prove that your beneficial ownership is unequal.
Further Guidance
If you own an FHL and are unsure what changes you should make moving forward under these new tax rules, don’t hesitate to get in touch with our team of experienced accountants at Digital Tax Matters. We’ll help you understand how the FHL tax regime’s abolishment will affect you and how you can best position yourself in the transitional period and beyond.