Abolition of the Furnished Holiday Lettings regime

by | Mar 6, 2024 | Other business, Tax, Technical

The government plans to discontinue the Furnished Holiday Lettings (FHL) tax regime from 6 April 2025 (1 April 2025 for companies). This has the effect of removing the tax benefit for landlords who rent out short-term furnished holiday accommodations compared to those who rent out residential properties to tenants for longer durations. This change will be widely impactful, the FHL having been in existence for nearly four decades. Favourable treatment for FHLs also extends to both individual and company ownership so will affect “businesses” with a variety of structures.

It is probably safe to say that the limitation imposed on tax deductions for mortgage payments against income from long-term rentals since 2016 substantially enhanced the appeal of FHLs. Categorising property letting as a FHL trade rather than a rental business could enable full relief for interest rather than only obtaining relief at the basic rate of tax. Furthermore, it allowed for the claiming of plant and machinery capital allowances, meaning that accelerated reliefs could be obtained for FHL expenditure compared to buy-to-let.

One of the major impacts was also that business asset disposal relief (giving a tax rate of 10%) might, depending on the precise facts, be available upon the disposal of the business, rather than the property gain being at a higher rate of CGT (previously 28%).

Along similar lines, whereas a long-term letting businesses is not a trade for substantial shareholding exemption purposes for companies, a furnished holiday letting business typically qualifies as a trade. A company that sells shares in another company who operates an FHL business therefore, does not generate a chargeable gain for corporation tax purposes, providing other conditions for the exemption are met.

From 6 April 2025, this regime will be scrapped. We would expect that this could affect the ‘Airbnb’ business model significantly.  The government hope that this will level the playing field between short- term and long-term lets and support people to live in their local area.

The abolition of the FHL regime, coupled with the lowering of the rate of CGT to 24% that was also announced, suggests the government is trying to implement an exit strategy for buy-to-let businesses, perhaps saturating the property market and benefitting those looking to buy.

A potential solution for those with furnished holiday lets, may be the incorporation of their property portfolios. This would mean that full tax relief could be obtained for interest costs. However, transferring properties into companies can present other considerations such as administrative costs on the transfer of mortgages, and tax matters such as SDLT charges for the company, and a gain for the individual when the property is transferred. In addition, the gain on the property once eventually sold from within the company will attract a 25% tax charge rather than the lower 24% CGT rate for individuals, also being implemented following the Spring Budget.

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