The Chancellor Rachael Reeves announced the following draft legislation measures in relation to the abolition of the furnished holiday lettings relief in her statement to the House of Commons yesterday.
Current Rules
Under the existing regulations, FHL properties enjoy several tax advantages compared to other property businesses:
- Exemption from finance cost restriction rules, allowing loan interest to be deducted at the basic rate of Income Tax.
- More favorable capital allowances.
- Access to reliefs from taxes on chargeable gains for trading business assets.
- Inclusion as relevant UK earnings for pension relief calculations.
To qualify as an FHL, properties must be available for short-term letting to the public for at least 210 days and actually let for 105 days or more each tax year. Long-term lets exceeding 31 days are restricted.
Proposal Details
The proposed changes will take effect on or after 6 April 2025 for Income Tax and Capital Gains Tax, and from 1 April 2025 for Corporation Tax and Corporation Tax on chargeable gains.
Current Law
The current tax rules for FHLs are outlined in:
– Part 3 of the Income Tax (Trading and Other Income) Act 2005
– Part 4 of the Corporation Tax Act 2009
– Part 7 (sections 241 and 241A) of the Taxation of Capital Gains Act 1992
– The Capital Allowances Act 2001
Proposed Revisions
The new legislation will eliminate the tax benefits for FHLs by:
– Applying finance cost restriction rules, limiting loan interest to the basic rate for Income Tax.
– Removing capital allowances for new expenditure and introducing replacement of domestic items relief.
– Withdrawing access to reliefs on chargeable gains for trading business assets.
– Excluding FHL income from relevant UK earnings for pension relief calculations.
After these changes, former FHL properties will be treated the same as non-FHL properties within a person’s UK or overseas property business.
Transitional Rules
Specific transitional rules will apply:
– FHL businesses will no longer benefit from capital allowances but can claim replacement of domestic items relief. Existing capital allowances pools can continue to claim writing-down allowances.
– Losses from an FHL business can be carried forward and set off against future profits of the overall property business.
– Eligibility for roll-over relief, business asset disposal relief, gift relief, relief for loans to traders, and exemptions for company disposals with substantial shareholdings will cease. However, existing conditions for these reliefs will not be affected if they were satisfied before the repeal.
– Business asset disposal relief may continue for disposals within three years of business cessation if FHL conditions were previously met.
– An anti-forestalling rule will prevent exploiting unconditional contracts to gain tax advantages before the new rules take effect from 6 March 2024.
Next Steps
Property owners using platforms like Airbnb should seek professional tax advice to navigate these changes. Contact our team on 01902 711370 or email enquiries@uklandlordtax.co.uk to book a call with one of our team of tax advisers to explore ways in which you can plan taking into account the above changes.