Abolition of the FHL Tax Regime
During the Spring Budget 2024, the Chancellor announced the abolition of the Furnished Holiday Lettings (FHL) tax regime starting from April 2025. This change will affect many property owners who have benefited from the favourable tax treatment offered to FHLs.
Understanding Furnished Holiday Lettings (FHL)
Furnished holiday lettings refer to properties available for short-term stays by holidaymakers. To qualify as an FHL, owners must make their property available for commercial short-term letting for a minimum number of days each year and rent it out to guests for at least some of that time.
These properties have enjoyed several tax advantages compared to other rental properties.
Current Tax Benefits of FHLs
The FHL tax regime has provided various tax reliefs that make these properties attractive investments:
- Income Tax Relief: Individuals can deduct the interest on loans used to buy an FHL from their taxable profits. This differs from standard residential lets because they cap tax relief on finance costs at 20%.
- Capital Allowances: Owners of FHLs can claim capital allowances on the cost of furnishings and equipment, reducing their taxable profits.
- Pension Contributions: Income from FHLs counts as earned income, making it advantageous for pension contributions.
- Capital Gains Tax Reliefs: When selling an FHL, owners can benefit from business asset disposal relief, reducing the capital gains tax rate to 10% for gains up to £1 million. This significantly reduces the rates compared to those applied to other property sales.
Why the Government is Abolishing the FHL Regime
The government expects to raise an additional £355 million in tax receipts by 2027/28 from this change. The abolition of the FHL tax regime is part of a broader effort to simplify the tax system and close loopholes that provide tax advantages to certain types of property businesses.
Key Dates to Remember
- 1st June 2024: The government will abolish stamp duty land tax multiple dwellings relief (SDLT MDR).
- April 2025: The FHL tax regime will end.
Impact on Property Owners
Property owners will need to make several adjustments due to the abolition of the FHL tax regime.
These include bringing in disposal values for assets where you have claimed capital allowances and understanding the implications of anti-forestalling rules, which will prevent you from using unconditional contracts to secure capital gains relief under the old FHL rules.
- Shift to Long-Term Lets: The changes may push landlords to move from short-term holiday lets to long-term residential tenancies. Though these do not offer the same tax benefits as FHLs, they provide a more stable income stream.
- Consideration of Incorporation: Some landlords might consider incorporating their property business. However, this decision requires careful tax planning and professional advice.
- Abolition of SDLT MDR: The government will abolish SDLT MDR in England and Northern Ireland from 1 June 2024. This relief currently reduces the stamp duty on properties with multiple dwellings.
- Transitional Rules: Contracts exchanged before 6 March 2024 will still benefit from MDR if completed before 1 June 2024. Linked transactions after this date won’t qualify for the old relief.
- Other SDLT Changes: Starting 6 March 2024, the government will protect registered providers of social housing from charges when they buy properties with public subsidies. Public bodies will be exempt from the 15% SDLT rate.
- Additionally, the government will amend first-time buyers’ relief rules for new leases via nominees or bare trusts.
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