By Keith Johnston, tax senior manager, Armstrong Watson
With the Furnished Holiday Let (FHL) regime set to be abolished from April 2025, and the detail of the changes and draft legislation now published, holiday let owners and farmers who have diversified in this way, can look at their options.
What are the proposed changes?
Income from furnished holiday lets will be treated the same as a long-term let and a number of favourable tax benefits will be lost.
Tax relief available on loans taken out to purchase or refurbish an FHL property will be restricted to 20% basic rate of tax rather than a person’s marginal rate, meanwhile beneficial capital allowance rules for new expenditure, which reduced the taxable profits of an FHL, will be removed. Income from FHLs will no longer be counted as relevant UK earnings when calculating maximum pension relief.
Additionally, Capital Gains Tax (GCT) reliefs will also change when it comes to selling or gifting a property. If you are planning to dispose of your furnished holiday let, you will need to consider various factors that will impact your tax liability.
Should I gift my furnished holiday let to my children before the end of the tax year?
Gifting a holiday let children or other family members could be beneficial even though the Inheritance Tax (IHT) treatment of FHLs is not changing.
HMRC invariably argues that an FHL business is an investment activity and does not qualify for any IHT relief.
If an FHL is gifted in the current tax year, and a capital gain arises, it should be possible to defer the Capital Gains Tax (CGT) payable by claiming holdover relief. This means that CGT is only paid if the property is sold in the future.
However, CGT will be payable if you gift the property in the 2025/2026 tax year, even though no money has changed hands.
If I sell my FHL this year, can I claim rollover relief?
You still claim rollover relief on the sale of an FHL in the current tax year if you reinvest the proceeds in other qualifying assets.
However, from April 2025 a furnished holiday let is no longer a qualifying asset for rollover relief.
This means that CGT on the sale of an FHL cannot be deferred by purchasing replacement assets used in a different trading business. Likewise, the purchase of an FHL property will no longer defer the CGT payable on the sale of other business assets.
Can Business Asset Disposal Relief (BADR) still be claimed on the sale of a holiday cottage?
Business Asset Disposal Relief reduces the rate of CGT to 10%, subject to meeting the conditions for relief.
Until April 5 2025, an individual can still qualify for BADR on the sale of an FHL property.
It may also be possible to claim BADR on a sale after April 5, but only if the property ceases to qualify as a FHL before April 5 2025, and the property is sold within three years of the cessation of the FHL business. This is a particularly complex area, and careful planning is essential.
Anti-forestalling legislation for these FHL changes is in place to prevent the above reliefs being claimed where the transaction does not complete until after April 52025
If you are considering any of the options above, it is vital to plan ahead of the incoming changes.
