The long-awaited draft legislation for the change to the Furnished Holiday Let (FHL) rules was published 29 July 2024.
When are the rules changing?
The changes will take effect:
· on or after 6 April 2025 for Income Tax and for Capital Gains Tax
· from 1 April 2025 for Corporation Tax and for Corporation Tax on chargeable gains
What is changing?
Relief for loan interest
Income Tax relief on loan interest for individuals will be restricted to the basic rate of Income Tax. This could have a big impact on anyone with significant borrowings against their FHL properties.
Jointly owned property
Under current rules FHL properties are excluded from the jointly held property rules for spouses/civil partners.
From 6 April 2025 these properties will no longer be excluded which means the couple will be taxed 50:50 on the income unless the interest in the property is unequal and they make an election to be taxed accordingly.
Pension contributions
Income from former FHL properties will no longer be classed as relevant UK earnings when calculating maximum pension contributions.
Losses
Ex FHL properties will become part of the taxpayer's UK or overseas property business, as appropriate. Where FHL losses are carried forward at 5 April 2025 they will be able to be offset against rental profits of the combined business in future years.
Capital allowances
No capital allowances will be available on FHL businesses for expenditure incurred on or after 6 April 2025. Previous allowances are not going be clawed back as you are not required to bring in a deemed disposal at market value when the current rules end.
Where assets were bought before the rules end but full capital allowances have not been claimed, Writing Down Allowances (WDAs) can continue to be claimed.
As with other lettings of dwellings, replacement of domestic items relief will apply to expenditure incurred after the rule change which basically allows a deduction for the replacement of certain domestic items, such as carpets or moveable furniture.
Capital Gains Tax (CGT) reliefs
Any former FHL properties disposed of after 6 April 2025, can no longer be treated as an asset of a trade for CGT purposes.
The result of this is that these CGT reliefs will generally cease to be available for disposals on or after 6 April 2025:
· Business Asset Disposal Relief 10% rate– (except for in very limited scenarios)
· Business Asset Rollover Relief
· Holdover Relief for gifts
· Relief for loans to traders
A rule took effect from Budget Day, 6th March, 2024 which prevents the obtaining of a tax advantage through the use of unconditional contracts to obtain capital gains relief under the current FHL regime.
How do the changes affect limited companies?
The above rules will apply for accounting periods beginning on or after 1 April 2025. Accounting periods straddling 1 April 2025 will be time apportioned into two separate periods.
Former FHL businesses will not be treated as a trade from 1 April 2025 for capital gains purposes, meaning the availability of the Substantial Shareholding Exemption (SSE) will cease.
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