One of the unexpected announcements in the 2024 Budget (No. 1) was the proposed abolition of the special tax treatment of qualifying Furnished Holiday Lets (FHL). Previously, this treatment applied when certain availability and occupation targets were met (210 days and 105 days, respectively, excluding lets of over 31 days). Qualifying properties benefitted from full allowability of loan interest, favourable capital allowances rules, and certain capital gains tax reliefs. Additionally, the income was treated as “earned” for the purposes of pension relief.
Although these changes were not included in the 2024 Finance Act, they have now been published, presumably for inclusion in the No. 2 Finance Act 2024. Starting from the end of the 2024/5 tax year, the special treatment of FHL income for individuals, corporates, and trusts who operate or sell FHL accommodation will simply be treated in line with all other property income and gains.
Fortunately, there will be transitional rules which will apply to formerly qualifying FHLs after 2024/5 as follows:
- Capital Allowances: Capital allowances will no longer be available, but properties will be eligible for ‘replacement of domestic items relief’, where appropriate. This “allows a deduction for the replacement (but not initial purchase) of certain domestic items”.
- Ongoing Capital Allowances: Where an existing FHL business has an ongoing capital allowances pool of expenditure, it can continue to claim writing-down allowances on that pool.
- Property Business Integration: Former FHL properties will become part of the person’s UK or overseas property business profits and losses of all the properties in that business will be amalgamated, effectively removing the restriction of loss offset between FHLs and other properties will no longer apply. This may be helpful during major refurbishments or reequipping of a former FHL. In the past any losses incurred in the refurbishment could only have been carried forward against future FHL income.
- Brought Forward Losses: Brought forward FHL losses can be carried forward and set off against future years’ profits of either the UK or overseas property business, as appropriate. This may also be beneficial for those who have claimed substantial capital allowances in the past but have been unable to utilise them.
- Capital Gains Tax (CGT) Reliefs: The CGT benefits of roll-over relief, business asset disposal relief, and gift relief will cease. However, where criteria for relief includes conditions that apply in a future year, these specific rules will not be disturbed if the FHL conditions are satisfied before repeal (e.g. there will be no automatic clawbacks of previous reliefs)
- Business Asset Disposal Relief: In relation to business asset disposal relief, if the FHL conditions are satisfied for a business that ceased before the commencement date, relief may continue to apply to a disposal that occurs within the normal three-year period following cessation.
- Anti-Forestalling Rule: An anti-forestalling rule 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 applies from 6 March 2024
According to MHA agricultural partner Joe Spencer,
It’s regrettable that the FHL regime is being lost. FHLs have been a key diversification for many farms and are often viewed as just another part of the farming activity. It seems perverse that they should be singled out and treated as investment activity in future. On the other hand, the transitional provisions will be helpful in reducing the financial impact of the changes. They may provide positive short-term gains to some businesses and, on the whole, are probably rather better than we feared. There may even be some planning opportunities over the next few months, such as timing capital expenditure, ensuring the occupation criteria are met, and even pension planning, so a meeting with the accountant should be time well spent.
With these significant changes on the horizon, it is crucial to act now. Get in touch today to explore potential planning opportunities, ensure compliance with the transitional provisions, and mitigate the impact on your business. Proper planning in the coming months could help you navigate these changes effectively and potentially benefit from short-term gains. Don't wait, start your planning today to secure the best possible outcome for your FHL.
