Since the Spring Budget abolished the furnished holiday lettings regime, detailed guidance has been sparse, and the upcoming general election has only added more uncertainty. So, what is the future of the FHL regime and its impact on taxpayers if abolition happens?
The announcement in the March Budget that the furnished holiday lettings (FHL) regime was to be abolished from April 2025 surprised many but perhaps even more surprising is the lack of practical detail surrounding the announcement.
What we know
All that was announced on the day was a brief paragraph in the Overview of Tax Legislation and Rates (OOTLAR) saying: “The government will abolish the Furnished Holiday Lettings tax regime, eliminating the tax advantage for landlords who let out short-term furnished holiday properties over those who let out residential properties to longer-term tenants. This will take effect from April 2025.
“Draft legislation will be published in due course and include an anti-forestalling rule. This will prevent the obtaining of a tax advantage through the use of unconditional contracts to obtain capital gains relief under the current FHL rules. This rule will apply from 6 March 2024.”
The measure was not included in the Finance Bill and two months after the Budget we are still no wiser as to what the anti-forestalling rule will be.
Various professional and trade bodies have made representations and there was a brief Westminster Hall debate on 1 May. No formal consultation is planned.
This is not the first time that the FHL tax regime has faced the death sentence, and before it happens – if it happens - taxpayers deserve fair warning so that they can plan sensibly.
In who's backyard?
MPs who spoke in the Westminster Hall debate naturally highlighted issues in their own constituencies. In many regions, holiday accommodation is a key part of the local economy; in others holiday properties and second homes reduce the available residential housing stock for local people.
The loss of relief for interest at all rates in this “levelling up” will be a blow for many. But there are also the CGT aspects to consider. In some instances, owners will have been expecting to obtain Business Asset Disposal Relief (BADR) on any disposal. In others, they may have been contemplating hold-over relief or roll-over relief.
They now face uncertainty over whether the FHL regime will in fact be abolished after the general election, if so when, what the anti-forestalling rule will actually try to forestall and what if any action to take. They might also be wondering about future CGT rates.
In some cases FHL properties will have been financed, in part, by rolling over gains on the disposal of farmland. While those rolled-over gains will only crystallise on disposal of the property (not on the ending of the FHL regime), in some cases they will be substantial. There will also be capital allowances balancing charges in some cases (and as the CIOT pointed out in its representation, these would be “dry” charges).
Not for the first time the policy abolition appears knee-jerk and ill thought out. For many property owners it is a hugely unsatisfactory situation.
The Devil in the Detail
Some points from the Westminster Hall debate are worth noting. The Professional Association of Self-Caterers estimates that 197,000 properties in the UK fall within the regime (the Office of Tax Simplification – OTS - gave a lower figure in its Property Income Report in 2020) and that 39% of those properties can only be used for holiday purposes due to planning restrictions.
It is not, therefore, the case that all FHL properties could be released on to the residential property market (and as at least one MP pointed out, even if they could they would not necessarily be affordable by local people).
While several MPs questioned the evidence for suggesting that FHL tax relief has a disproportionate effect on house prices, the Financial Secretary to the Treasury asserted that there was broad recognition that the current system is contributing to some distortions and cited his experience as tourism minister. He confirmed that there are no plans for a formal consultation. A key aim, he said, is simplification.
The Middle Ground
The OTS in its Property Income Review, published in November 2022, explored the question of abolishing the FHL regime. If the government decided to do so, the OTS suggested a “brightline” test should be introduced to make the boundary between trading and investment clearer.
Possible factors in such a test could include the number of properties let, that the letting is short term rather than long term, no personal use and distinguishing cases where there is a profit motive from those where the motive is long term investment.
In response to a question from ICAEW, HMRC recently confirmed that the idea of a brightline test has been rejected. The letter promises that “the details of how the transition from furnished holiday lettings will operate will be set out in draft legislation and accompanying documentation to be published soon.”
When “soon” will be, given the calling of the election, is anyone’s guess.
The rejection of a brightline test is disappointing and leaves us with the familiar trail of cases on trading versus property investment.
In Conclusion
At this point, we have the worst of all possible worlds for taxpayers: an announcement that a tax regime many have relied on is to be withdrawn, with no draft legislation, no indication of any transitional measures and the threat of an anti-forestalling measure without revealing what it will actually forestall. That is tantamount to saying “we are going to render something that you might do ineffective, but we are not going to tell you what it is”.
As the CIOT representation puts it, “As a general point it is obviously difficult for taxpayers to comply with provisions in force that have not been published and such an approach seems contrary to the Charter commitment to help taxpayers meet their tax responsibilities”.
Before any further announcement is made, maybe a re-reading of the OTS paper would be wise. Its analysis of the issues was based on wide consultation and its conclusions were both thorough and clear. And clarity, above everything, is what we need.
How Can Visionary Accountants Help?
In the midst of this legislative ambiguity, Visionary Accountants in St Albans can provide guidance and support for holiday let property owners navigating the potential abolition of the FHL regime. The uncertainty surrounding the future of furnished holiday lettings requires specialised advice and strategic planning to mitigate potential financial impacts. Our accountants in St Albans can assist in several critical ways:
-
Strategic Tax Planning: Visionary Accountants can provide tailored tax planning strategies to prepare property owners for the possible abolition of the FHL regime. By analysing your specific situation, our accountants can identify potential tax liabilities and opportunities for tax relief, ensuring that you can make informed decisions about your property investments. This includes assessing the implications of losing tax advantages such as Business Asset Disposal Relief (BADR) and exploring alternative reliefs and deductions.
-
Navigating Legislative Changes: With the current government yet to release detailed legislation and guidelines, and the imminent next government a complete unknown quantity, staying updated on any developments is crucial. Visionary Accountants closely monitor legislative changes and provide timely updates to clients. This proactive approach allows property owners to stay informed and advised, ensuring you can adapt your strategies accordingly. The accountants’ expertise in interpreting complex tax legislation ensures clients are not left in the dark about their obligations and opportunities.
-
Anti-Forestalling Measures: The introduction of anti-forestalling rules adds another layer of complexity to the situation. Visionary Accountants can help holiday let property owners understand these rules and advise on actions that can be taken to avoid unintended tax consequences. By clarifying what actions might be targeted by anti-forestalling measures, we help clients navigate this uncertain landscape without falling afoul of new regulations.
-
Alternative Investment Strategies: With the potential abolition of the FHL regime, holiday let property owners may need to reconsider their investment strategies. Visionary Accountants can suggest alternative investment opportunities that align with clients' financial goals and tax planning needs. This might include transitioning to long-term residential lettings or exploring other tax-efficient investment options.
In these uncertain times, Visionary Accountants provide the expertise and clarity needed to navigate the evolving tax landscape. By offering strategic advice and practical solutions, our accountant help holiday let property owners safeguard their investments and optimise their financial outcomes amidst the potential upheaval of the FHL regime.
A Little-Known Fact About Holiday Lets in St Albans
St Albans hasn't traditionally been known as a top holiday destination, but things are changing. With its close proximity to London and key transport hubs, St Albans is increasingly becoming a tourist hotspot. In fact, there are currently 284 holiday homes listed to rent in and around St Albans on Homes to Go, properties listed on Airbnb. In addition to this, St Albans is home to investors with holiday homes throughout the UK and abroad. Therefore, speaking to your local accountant in St Albans becomes even more relevant.