Background
In the 2024 Spring Budget it was announced that the Furnished Holiday Let (FHL) rules will be abolished from April 2025. This week’s Muras Matters looks at how this might impact the owners of FHL’s.
Detail
Businesses currently qualifying as an FHL have the following tax breaks, which do not apply to general letting business:
- Business asset taper relief (BADR) can apply on a disposal of the business, giving a 10% capital gains tax rate;
- Capital gains tax holdover and rollover relief can be claimed;
- Finance costs can be deducted in full;
- Plant and machinery capital allowances can be claimed;
- Profits can be strategically allocated to co-owners easily;
- Profits count as relevant earnings for the purpose of working out the pension annual allowance.
The abolition of the FHL rules will mean these breaks will be lost.
Although the change does not come into effect until April 2025, an anti-forestalling rule has been announced to prevent obtaining a tax advantage through the use of unconditional contracts to obtain capital gains relief under current FHL rules. However, the detail of this rule is still awaited.
Continuing to let
The most significant change to a continuing business will be the restriction of relief for financing costs, in particular mortgage interest. Instead relief is given as a reduction at the basic rate, 20%, on the lesser of;
- the finance costs; or
- the rental profit; or
- the owner’s adjusted total income.
This could mean that a tax liability arises even though the letting business has made a loss in cash terms.
Plant and machinery allowances will no longer be available. The more restrictive relief for replacing domestic items will need to be claimed.
Selling up
The year window before the FHL rules are abolished should give owners chance to reflect and still take advantage of the CGT breaks (subject to the anti-forstalling rules not yet set out).
If owners decide that the change in rules leads them to a cessation of business, it will be important to ensure entitlement to BADR is secured. The trigger will be the cessation of business activity. The disposal will also need to take place in the 24-25 tax year with the FHL rules applying for the two years prior to cessation.
As soon as further details become available we will update you. If you would like more information please speak to out Tax Director, Jenny Marks.
To see our other news items please visit our Muras Baker Jones – Blog.