The devil in the detail; Furnished Holiday Lets – is it time to sell?

By way of update, the new Labour government has confirmed it will proceed with the abolishment of the tax-advantageous rules, and more importantly the new Chancellor Rachel Reeves has now come out with the proposed draft legislation, containing the all-important detail. 

If you are considering a sale of your furnished holiday let (FHL), we strongly recommend that you seek advice as soon as possible.  We can advise whether the 10% rate of tax will apply.  If action is taken after 5 April 2025, the rate would be 24% subject to any changes to be announced in the Budget on 30 October 2024.

Whilst this legislation is still only at the draft stage, it does allow us to examine the proposals, which are as follows:

The key tax benefits that will be removed from April 2025

• Full interest and finance cost tax relief
• More beneficial capital allowance tax deductions on fixtures and furniture
• Access to reliefs from taxes on chargeable gains for trading business assets including gift holdover relief, business asset disposal relief (10% tax rate) and rollover relief
• Inclusion as relevant UK earnings for pension purposes

The further detail regarding the transitional rules:

Capital allowances – instead of full deductions for purchases of fixtures and furniture items, only expenditure on the replacement of domestic items will attract relief. This is in line with other property letting businesses e.g. buy-to-lets.

However, once these rules take effect from April 2025 there will not be a claw back of capital allowances already claimed. Those with an existing claim can continue.

New capital allowance claims will be available until April 2025, so if you think you could benefit from a claim before it is too late – please reach out.

Losses – Where a furnished holiday letting (FHL) business is carrying forward a loss into April 2025, when the FHL status will change, these losses will not be lost.

FHL properties will become part of a normal property business and that business will combine the profits and losses of all the properties in that business. The losses being carried forward will therefore be available to set against future year profits of the combined property business.

Capital gains (CGT) reliefs – under the current rules FHL properties are eligible for rollover relief, business asset disposal relief (10% tax rate) and gift relief. After the changes, the eligibility for the reliefs will cease. Aside from Business Asst Disposal Relief (BADR), there are no transitional rules for rollover or gift relief on the FHLs.

Business Asset Disposal Relief (BADR) where the FHL conditions are satisfied in relation to a business that ceased prior to April 2025, relief may continue to apply to a property disposal that occurs within the normal three-year period following cessation. This means that, in limited circumstances, the advantageous tax rate of 10% could apply to a disposal as late as April 2028.

This is provided that such a sale would not be within the ‘anti-forestalling rules’. These rules prevent the obtaining of a tax advantage using unconditional contracts to obtain CGT reliefs by selling or disposing to a connected party, between 6 March 2024 completing after 5 April 2025.

How can Haines Watts help?

We advise clients with a broad range of tax and compliance matters throughout the South West region.

We appreciate that this is quite a technical update, therefore if you are in any doubt about how any of the rules and proposed legislation may affect your FHL business, please get in touch with your usual Haines Watts contact.