Spring Budget 2024 – Furnished holiday lets

Furnished holiday lost..

After a build-up of media speculation, and furnished holiday let (FHL) owners’ anticipation, the Chancellor declared the straightforward, but impactful, measure to increase the number of long term lets available to the UK residential tenant market by abolishing the FHL preferential tax regime.

The measure removes the specific tax treatment and the separate self-assessment reporting requirements for FHLs, with income and gains forming part of the taxpayer’s UK or overseas property business.

The measure will take effect from 6 April 2025 for income tax and capital gains tax, and 1 April 2025 for corporation tax.

Impacts on FHL owner taxpayers

The specific tax treatments that will be abolished include:

The exemption from finance cost restriction rule

FHL owners will no longer be able to take into account finance costs, such as mortgage interest, when calculating taxable profits. Instead, tax relief for finance costs will align with the existing rules for a typical residential property let, whereby it is possible for them to be brought in as a tax reducer at the basic rate.

Higher rate taxpayers will, therefore, pay 20% of tax on the amount of finance cost, and additional rate taxpayers will pay 25%. This could also drive additional tax as a result of the increase in total income, for example personal allowance tapering for those whose income is pushed over £100,000, or exposure to the high income child benefit charge, for those whose income is pushed over £60,000.

The beneficial capital allowances rules

Where FHL businesses were previously entitled to claim capital allowances on plant and machinery, as well as the furniture, white goods, etc. within the property, they will instead align with non-FHL businesses which do not qualify for any of these.

The access to reliefs from capital gains tax (CGT)

The most noticeable relief lost for taxpayers will be that of business asset disposal relief (BADR), which allowed for a fixed tax rate of 10% on capital gains arising for disposals of FHLs up to an individual’s lifetime allowance of £1 million, saving couples with no other BADR qualifying assets up to £280,000 of CGT.

Following the FHL rules being abolished, sales of FHLs will be taxed to the standard residential property capital gains tax rates (18% basic rate and 24% higher rate). As part of the Budget releases, it was also announced that an anti-forestalling rule will be introduced in due course to prevent obtaining a tax advantage through the use of unconditional contracts to obtain CGT relief under the current rules. It states that this rule will apply from 6 March 2024, but no further information has been given on how this rule will operate at present.

In addition, FHLs will no longer qualify for business asset rollover relief or gift holdover relief, resulting in tax arising for individuals who may be looking for a change of business or to retire and pass on assets to successors.

The inclusion of relevant UK earnings when calculating maximum pension relief

Individuals who take advantage of the tax reliefs available on making pension contributions will be aware that these rules are complicated but very beneficial if well planned. However, the majority of the relief available in these instances is connected to that individual’s net relevant earnings (NRE), typically employment salary or trading income. As FHLs will no longer qualify as trading income, pension contribution tax relief available will be reduced where FHL profits have previously been included as NRE.

For more Spring Budget 2024 analysis, click here.

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