At last, after a long wait since March 2024, we know what the legislation will be…….
Policy paper
Abolition of the furnished holiday lettings tax regime
Published 29 July 2024
Operative date
The measure will have effect:
- on or after 6 April 2025 for Income Tax and for Capital Gains Tax
- from 1 April 2025 for Corporation Tax and for Corporation Tax on chargeable gains
Current law
The current law on the tax rules for furnished holiday lettings is contained in:
- Part 3 of the Income Tax (Trading and Other Income) Act 2005
- Part 4 of the Corporation Tax Act 2009
- Part 7 (specifically sections 241 and 241A) of the Taxation of Capital Gains Act 1992
- the Capital Allowances Act 2001
Proposed revisions
This change will remove the tax advantages that current furnished holiday let landlords have received over other property businesses in 4 key areas by:
- applying the finance cost restriction rules so that loan interest will be restricted to basic rate for Income Tax
- removing capital allowances rules for new expenditure and allowing replacement of domestic items relief
- withdrawing access to reliefs from taxes on chargeable gains for trading business assets
- no longer including this income within relevant UK earnings when calculating maximum pension relief
After repeal, former furnished holiday let properties will form part of the person’s UK or overseas property business and be subject to the same rules as non-furnished holiday let property businesses.
The following specific transitional rules will apply:
- businesses with FHL properties will no longer be eligible for more beneficial capital allowances treatment but will instead be eligible for ‘replacement of domestic items relief’ in line with other property businesses — where an existing FHL business has an ongoing capital allowances pool of expenditure, they can continue to claim writing-down allowances on that pool — any new expenditure incurred on or after the operative date must be considered under the property business rules
- under current rules a loss generated from a FHL property business can only be carried forward and utilised against future profits of that same FHL business — after the changes, former FHL properties will be part of the person’s UK or overseas property business as appropriate — that property business will then include the amalgamated profits and losses of all the properties in that business
- persons may have losses to carry forward from their FHL business after repeal — losses generated from this FHL business will be permitted to be carried forward and be available for set off against future years’ profits of either the UK or overseas property business as appropriate
- under current rules FHL properties are eligible for roll-over relief, business asset disposal relief, gift relief, relief for loans to traders, and exemptions for disposals by companies with substantial shareholdings — after the changes eligibility for the reliefs will cease — however, where criteria for relief includes conditions that apply in a future year these specific rules will not be disturbed where the FHL conditions are satisfied before repeal
- in relation to business asset disposal relief, where the FHL conditions are satisfied in relation to a business that ceased prior to the commencement date, relief may continue to apply to a disposal that occurs within the normal 3-year period following cessation
- there is also 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 applies from 6 March 2024
Capital Allowances – Claim them now!
Now that we know you can continue to use the capital allowances pool after 5th April 2025 its worth claiming capital allowances now if you are eligible.
We had previously assumed there would a clawback on the 5th April 2025 by creating a balancing charge because the Holiday Let activity would cease, but now we know that won’t be the case, which is great news and a big relief for FHL owners.
