Background
Under current legislation qualifying furnished holiday lets have been eligible for business rates, rather than subject to council tax, and often are then able to claim small business rates relief. Following the tightening of the eligibility rules for business rates on second homes announced by the government at the start of the year further changes were announced in the Queen’s Speech in May this year.
New legislation was announced as part of the Queen’s Speech to grant local authorities the power from April 2024 to charge double the amount of council tax on second homes in England that are furnished but not occupied as the owners sole or main residence. Only those properties that are actually rented out as self-catering holiday lets for at least 70 days a year will be exempt from this increase. Separate rules for Wales will see the current council tax charge on second homes and long-term empty properties rise from the current maximum of 100% to 300% from April 2023.
These changes to council tax for second homes may see owners of furnished holiday lets reconsider if they should continue to run their letting business. As part of this process they should be aware of the tax implications if they decide to sell their property.
Detail
As part of the Government’s levelling up and regeneration plans announced in this year’s Queen’s Speech local authorities in England will be given the discretionary power from April 2024 to levy a premium of up to 100% on council tax bills on second homes that are furnished but not occupied as the owners sole or main residence. The increased premium may also be applied to long-term empty properties where they have been empty for 12 months rather than the current two year period.
From April 2023 second home owners in England will no longer qualify for business rates and will instead be liable for council tax, potentially at up to double the normal charge for council tax from April 2024. The owner will only qualify for the business rates relief if they can prove the property was actually let for 70 day in the year, and available for letting for at least 140 days in the year.
Separate rules are to be introduced in Wales from April 2023, where the devolved Welsh government has provided for local authorities to be able to charge a council tax premium up to a maximum of 300% on second homes and long-term empty properties. The current premium is a maximum of 100% of the council tax charge. The new rules will also make it harder for properties in Wales to be eligible for business rates instead of council tax by increasing the number of days the property must be let from the current 70 days per year to 182 days per year.
These changes to the council tax rules on second homes may well see many individuals or property businesses decide that it is no longer viable for them to run their holiday rental business and instead look at the possibility of selling these properties. It is important for taxpayers to note that the eligibility for a property to be treated as a furnished holiday let for business rates purposes rather than for income tax purposes will be quite different based on number of days and location of the property.
It is worth remembering that the sale of any residential property may require a capital gains tax report to be filed with HM Revenue & Customs (HMRC) within 60 days and any capital gains tax (CGT) arising paid also within the 60 days.
Where the property has been eligible to be treated as a qualifying furnished holiday let for income tax purposes any disposal may be eligible for business asset disposal relief (previously known as entrepreneurs’ relief) at the lower CGT rate of 10%. Gains not eligible for this relief are subject to a CGT rate of either 18% or 28% depending on the level of an individual’s income and the size of the gain. Only the first £1 million of an individual’s relevant lifetime capital gains can qualify for business asset disposal relief.
For those considering potentially selling their furnished holiday let they are a number of potential tax planning opportunities that may be available depending upon the individual taxpayers circumstances.
If you would like further information on the tax treatment of a rental property or would like to look at the tax planning opportunities available on a disposal of one, please contact our Tax Director, Jenny Marks.
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