Author: Matthew Jeffery, Tax Director
The Spring Budget 2024 announced the abolishment of the special tax regime for short-term accommodation owners (Furnished Holiday Lets or FHL’s). This is a blow for owners of qualifying FHL’s, who are able to take advantage of special tax rules, for what has always been regarded as a hybrid trade/property business.
At this stage, there is very little information available beyond the government confirming that:
“From 6 April 2025, short-term and long-term lets will be treated the same for tax purposes. Individuals with FHL and non-FHL properties will no longer need to calculate and report income separately”.
No further or detailed guidance has been published at the date of this article. In the Budget Summary Report it states “draft legislation will be published in due course”. It is anyone’s guess how long that will be?
What We Know
The news has taken most people in the industry and certainly tax advisors by surprise, and although there is very little information available and still many questions to be answered, here is what we do know:
> No impact until tax year 2025!
FHL owners will still be able to be taxed under the FHL scheme for the current tax year 2023/24 (ending 5 April 2024) and 2024/25.
> Restriction of finance interest deductions
Interest on mortgage or loans to fund holiday let businesses will be subject to the restrictions on tax deductions for interest payments. From 2025, only a basic rate tax deduction can be claimed. This will impact higher rate taxpayers and some basic rate taxpayers who have other income and high interest costs.
> Capital Allowances
It is expected that holiday lets will be regarded as dwellings. If this is the case, from April 2025, FHL owners will no longer be eligible to claim capital allowances on furniture, equipment and part of the costs of purchasing, building, converting or refurbishing property for holiday letting. The only tax relief available going forward, would be for the replacement of ‘domestic items’.
> Capital Gains Tax
Abolishing the FHL regime will see the end of the availability of Business Asset Disposal Relief (BADR). The 10% CGT rate will no longer be available on sale of the property. The CGT rates for the sale of UK land & buildings will apply. For basic rate taxpayers, this will be 18% and 24%* for higher rate taxpayers (*4% reduction in rate announced in Spring 2024 Budget).
It is important to note that we would expect the draft legislation to 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 would apply from 6th March 2024!
CGT can also be deferred on the sale of a holiday let or, gift relief can be claimed if you passed the property on to children or beneficiaries. These reliefs are not available to long term let properties.
> Pension contributions
Unlike FHL’s, owners of long term lets are unable to make contributions to personal pensions funds to reduce tax liabilities. It is expected this will be the case for FHL owners from April 2025.
> Flexibility of profit sharing
Joint owners of long-term property lets must declare income and expenses in equal proportions. Under the FHL regime, joint owners were able to change the profit-sharing ratio each year. This provided flexibility to tax the profit on the lowest earner. Under long term let rules, profits must be taxed 50/50.
> Business rates
As qualification for business rating of an FHL is not linked to the FHL tax legislation, we would not expect any changes to the ability for FHL’s to obtain a business rating and claim small business rates relief.
What We Don’t Know
> VAT
Income from long term lets of residential property are outside of the scope of VAT. It is unclear, at this stage, if FHL’s will be treated in the same way for VAT. If they were taxed in line with long term lets, this would be great news for VAT registered FHL’s.
It is, however, possible/perhaps most likely, that the new legislation will still keep short-term lets within the charge to VAT. The revenue lost from VAT registered holiday lets would defeat one of the main objectives of the legislation in recouping lost tax!
The Budget did confirm that the turnover limit for VAT registration will be increased from £85,000 to £90,000. FHL owners with turnover below £88,000 can deregister.
> Unclaimed losses or capital allowances
A key question for FHL’s owners is what will happen to any losses or capital allowances pools remaining at the end of the 2024/25 tax year? FHL losses and capital allowances are ring fenced to FHL profits only. Will they be lost when the rules change? At this point, there is no guidance or even precedent on whether there will be any transitional rules that will transfer the balances across to offset against all rental profits in 2025/26 and future years. Let’s hope so!
What Should You Do?
Firstly, don’t panic! For a large number of owners, the changes will not have any major impact. If you don’t have a mortgage and have already claimed all your capital allowances, you should not see any major impact on your annual tax liability. You can still claim all the running expenses you claimed previously (e.g. cleaners, agents fees, utilities etc).
If you have a mortgage, but your total income including holiday letting is well within the basic rate tax band, there should be no impact on your annual tax liabilities.
Companies that own FHL’s will not be impacted by the restrictions on interest deductions. They can also still make pension contributions and share profits flexibly via dividends.
Owners with multiple properties, high interest costs or higher rate taxpayers will be affected the most. However, the delay in the new rules coming into force does gives owners some breathing space and time to ensure they have claimed all tax reliefs available and consider any options to structure their business tax efficiently.
Owners that haven’t already claimed capital allowances can still make a claim now and benefit from at least 3 years of tax relief. Those owners with pools of capital allowances remaining can claim them for another 2 years at least. Hopefully beyond that.
Owners with losses in 2022/23 can still claim them for another 2 years. Again, hopefully they will remain beyond that.
What’s Next?
Once the draft legislation is released, Zeal will study it in detail and provide a comprehensive summary for owners that will consider the impact and options available to them.
In the meantime, we would encourage all owners of holiday lets/serviced accommodation to ensure they have claimed all the capital allowances available as soon as possible.
If you would like to find out if you have any unclaimed tax relief, please contact the team at Zeal on 01633 386017 or by email on hello@gozeal.co.uk
Disclaimer by Zeal
This article was written by Matt Jeffery Head of Tax at Zeal Tax, a leading holiday let tax specialist firm in the UK. The information provided in this article is of a general nature. It is not a substitute for specific advice on your own circumstances. You are recommended to obtain specific advice from a professional before you take any action or refrain from action. Whilst we endeavour to use reasonable efforts to furnish accurate, complete, reliable, error free and up-to-date information, we do not warrant that it is such. We and our associates disclaim all warranties.
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