The UK government has provided some clarification on the common issues that have been raised regarding the abolition of the Furnished Holiday Lettings Tax Regime.
This information has also been published on gov.uk: Clarification on abolition of the furnished holiday lettings tax regime – GOV.UK (www.gov.uk)
Changing the way you rent
FHL repeal removes specific tax reliefs previously available to FHLs. After the rules change whether you continue to provide holiday accommodation or move to longer term letting the income and corporation tax rules will be the same. These changes do not affect other tax rules such as for VAT, council tax or business rates. Repeal of FHL rules does not mean you have to change the way you rent out property. These tax changes are the same whether or not there are any usage restrictions on a let property.
Individuals and companies
The changes apply to FHLs operated by individuals and companies.
VAT
The current VAT rules are not changing. Holiday accommodation, whether previously qualifying as an FHL or not, is still standard rated for VAT.
Expenses
The change to the rules does not affect the way that general expenses are claimed. Revenue expenses, such as for utilities, repairs, or consumables such as toiletries and cleaning products can still be claimed as they were before.
Finance and mortgage interest costs
After repeal the way finance costs are treated will change. After the changes individual landlords can still obtain relief for finance and mortgage interest costs, but at the basic rate of income tax of 20%, in the same way as other landlords. Companies are not subject to the finance cost restriction rules.
Capital expenditure and Capital Allowances
After repeal Capital Allowances are no longer available on fixtures, furniture or furnishings. Replacement of Domestic Items Relief will then be available on replacement items. Where qualifying capital expenditure has been included in a capital allowance pool by 5 April 2025, allowances and charges can continue to be claimed after April 2025 on that pooled expenditure until it is used up or a small pool claim is made.
Interaction with section 198 CAA 2001
An election under Section 198 allows the seller and purchaser of a property containing fixtures to fix the amount of the sale price for the property that is expenditure incurred by the purchaser on the provision of the fixture.
Whether the purchaser of the fixtures is able to claim capital allowances on their expenditure attributed to the acquisition of the fixtures by the Section 198 election will depend on whether the expenditure is qualifying expenditure in that person’s hands.
If the fixtures are for use within a dwelling-house (a holiday home used for holiday letting is a dwelling-house) and the purchaser is carrying on a property business, Section 35 Capital Allowances Act 2001 will treat the expenditure as not being qualifying expenditure. Therefore, the purchaser would not be able to claim capital allowances (including the Annual Investment Allowance (AIA)) on the expenditure.
Capital Gains Tax and anti-forestalling
Where an asset is disposed of under an unconditional contract it is assessed for CGT purposes at the time the contract is made rather than when it is completed. The anti-forestalling rule means that where a contract is made on or after 6 March 2024 and the disposal takes place on or after 6 April 2025 then CGT rollover, gift or Business Asset Disposal relief will not apply unless the claim includes a statement confirming that the conditions in paragraph 14(2) of the draft legislation are met.
Losses
Any losses incurred by the FHL in the tax year 2024-25 or carried forward from previous years will be treated as losses of the UK or overseas property business going forward. This means the losses can be set off against other property income for individuals, or against other income for companies in the following year.
Nations of the UK
The tax changes apply to all the nations of the United Kingdom. The rules for council tax and business rates are unchanged by the repeal of these FHL income tax and corporation tax rules. The rules for eligibility for business rates can be checked on the website for the appropriate devolved authority as they may differ.
FHLs commencing in the tax year 2024-25
Where a holiday letting business commences in 2024-25 the relevant period for the purposes of the occupancy conditions begins on the first day in the tax year (or accounting period) on which letting commences and may extend past April 2025. However, FHL status only applies to the 2024-25 tax year, or to 31 March 2025 for companies.
Cessation of business
The repeal of FHL provisions does not mean that FHL businesses have ceased, it merely disapplies the relevant legislation. The affected businesses will be continuing property businesses, until there is an actual cessation of business activity. Where legislation refers to the cessation of business, it means an actual cessation of business activity. The date of cessation is not the date that further bookings stop being taken, it is the date from which there are no longer any bookings or lettings nor any intention to resume such activity in future. To benefit from capital gains reliefs beyond April 2025, the business has to cease before 1 April 2025 for corporation tax or before 6 April 2025 for income tax and capital gains tax purposes.
Property Income and Trading
The abolition of the FHL provisions does not affect the existing rules and principles that determine whether income generating activity is income from property, trading income, or miscellaneous income. Whether activity is income from property depends on the nature of the activity undertaken and specifically how the profit is derived. If the activity is generating income from land, then the income is taxable as property income. Before repeal the FHL rules provided for specific reliefs, but the income has always been property income, not trading, for tax purposes.
Impact statement for individuals
The tax information and impact note refers to individuals separately from businesses. The impacts reflected under the section for individuals refer to individuals who do not operate a business. Individuals who operate a business are included in the business section.
Jointly held property
The abolition of the FHL provisions mean that holiday lettings are now treated the same as other property income. The share of any profit or loss arising from jointly owned property will normally be the same as the share owned in the property being let. But joint owners can agree a different division of profits and losses and so occasionally the share of the profits or losses will be different from the share in the property. The share for tax purposes must be the same as the share actually agreed.
However, where the joint owners are husband and wife, or civil partners, profits and losses are treated as arising to them in equal shares unless:
This can be declared by using Form 17, which must be submitted to HMRC within 60 days of your declaration of unequal shares – Declare beneficial interests in joint property and income – GOV.UK (www.gov.uk)
Voluntary Class 2 NIC
The repeal of the FHL rules does not affect eligibility to pay voluntary Class 2 or Class 3 NICs. Guidance on voluntary NICs contributions can be found here Renting out your property: Paying tax and National Insurance – GOV.UK (www.gov.uk)