In the March 2024 Budget, the then Chancellor Jeremy Hunt announced that the Furnished Holiday Lettings (FHL) regime would be abolished with effect from April 2025.
There was a possibility that the new Government might have reversed this decision, but draft legislation has now been published.
The draft legislation will, from 6 April 2025 (1 April 2025 for companies), enact the following:
Apply the finance cost restriction rules so that loan interest relief will be restricted to basic rate relief for income tax.
Remove the capital allowances rules for new expenditure and instead allow relief for replacement of domestic items.
No longer include FHL income within relevant UK earnings when calculating maximum pension relief.
Will end arrangements where some husband-and-wife owned properties have taken advantage of the fact that they have been able to split profits from an FHL business as they agree which has helped where spouses have allowances or spare basic rate tax band available.
With effect from 6 April 2025, the situation will default to the 50:50 and Form 17 position applicable to property rental businesses where joint owners are required to register their respective percentage ownership shares with HMRC if income is not to be shared jointly.
End the entitlement for Business Asset Disposal Relief to apply to a disposal where all FHL qualifying conditions for the relief apply.
End the entitlement for Business Property Relief to apply for Inheritance Tax purposes, albeit HMRC very rarely allowed claims where ancillary services to the FHL were not provided as part of the rental contract.
There will be some transitional rules.
Where an existing FHL business has an ongoing capital allowances pool of expenditure, it will be able to continue to claim writing-down allowances on that pool.
Any new expenditure incurred on or after 6 April 2025 will fall to be relieved under the general property business rules.
The current loss relief rules requires a loss on FHL income to be carried forward and set against future profits from the same FHL business. Any unrelieved loses at 5 April 2025 will be carried forward and added to non-FHL property losses.
Eligibility for roll-over relief, business asset disposal relief (BADR), gift relief, relief for loans to traders, and exemptions for disposals by companies with substantial shareholdings will cease.
However, where qualifying criteria for relief includes conditions that apply in a future year these specific rules will not be disturbed where the FHL conditions are satisfied before ending of the FHL regime.
Where the BADR conditions are satisfied in relation to a business that ceases prior to 5 April2025, relief may continue to apply to a disposal that occurs within the normal three-year period following cessation of the business.
To clarify this particular point, this would entail the property not being rented out as an FHL or otherwise after 5 April 2025 and being sold within 3 years of the date the property rental business ceased on or before the FHL regime cessation date of 5 April 2025.
Anti-forestalling rule
HMRC have also clarified how the anti-forestalling rule announced by Jeremy Hunt is designed to operate.
The rule is intended to counteract forestalling arrangements that aim to lock-in the application of the FHL rules where an asset is disposed of under an unconditional contract entered into on or after 6 March 2024, but the asset is conveyed or transferred (and so the contract completed) on or after 6 April 2025.
If you wish to discuss the content of the above and your FHL business moving forward, please do not hesitate to contact us.