Every week we take a look at what is trending in the accountancy and tax press and share items that we think will interest you. However, these are only outlines and where they relate to tax planning should not be acted upon without looking into them more completely as everyone’s circumstances are particular to them. You need to take specific advice appropriate to your own circumstances.

While every effort is made to deliver accurate, informative and balanced articles this content is general in nature and should not be used as the sole basis for making decisions.

 

Furnished Holiday Lets – The Implications

History

Before the FHL rules were introduced there was uncertainty around the tax considerations and whether they were trading like hotels or more akin to investments like long lets. The introduction of the furnished holiday lettings (FHL) regime rules in 1984 aimed to provide clarity. We now return to uncertainty.

The new legislation did not treat the activity as a trade but the income from it was taxed as trading income.

The FHL treatment applies to self-catering accommodation let on a commercial basis and meeting a minimum level of letting. This could be in the form of a house, cottage, flat, suite of rooms, caravan, or even a yurt, so long as it meets the specific conditions.

These letting rules from 2011/12 were as follows:

• 210 days availability, and
• 105 days of actual commercial letting

Additionally, an occupier of the let cannot stay for more than 155 days of a 12-month period (roughly five months). It does not count any days left to friends or family at reduced rates or lets of more than 31 days as these are not commercial.

In the Spring Budget on 6 March 2024, the Conservative Government announced that it would abolish the furnished holiday lettings (FHL) tax regime. The stated intention of this is to remove the current tax advantage for landlords who let short term furnished holiday properties over those who let out residential properties to longer term tenants.

The draft legislation sets out that the special FHL rules will be removed from the legislation for income tax, capital gains tax and corporation tax purposes from April 2025.

Key tax benefits for furnished holiday lets

1. It is possible to claim capital allowances for qualifying capital expenditures such as cookers, fridges, televisions, sofas, tables, chairs, beds, curtains, carpets, etc., as well as fixtures such as heating, lighting, electrics, bathrooms, and kitchens. Normal letting businesses are unable to claim capital allowances on this sort of expenditure.
2. Mortgage interest can be deducted in full from FHL rental profits for income tax purposes. This is often more favourable than the rules for let residential property which only allow a basic rate tax reducer.
3. Following the sale of an FHL property, you can claim capital gains tax (CGT) reliefs, which are normally only available to trading ventures. These include:
4. Business asset disposal relief – permits CGT at the rate of 10%
5. Rollover relief – allows deferral of specific chargeable gains upon the acquisition of new trading assets.

• Holdover relief – allows the deferral of chargeable gains that would otherwise arise on a gift of the property.

4. Profits from an FHL business are relevant earnings for pension contribution purposes. This means tax advantaged pension contributions can be made using profits from FHLs.
5. If spouses/civil partners operate an FHL they jointly own, they can divide the profits in any proportion desired – regardless of the actual ownership shares.

What is not changing from April 2025?

1. VAT

The VAT treatment of supplies of short term lets of FHLs will remain the same and are subject to VAT at the standard rate, currently 20%. As such, an FHL business with a rolling 12-month turnover above £90,000 from 1 April 2024 (previously £85,000), will need to be registered for VAT and account for VAT at 20% on income received from short term FHL lets.

1. Business rates

Whether an FHL business pays business rates will depend on how many nights the property is available to let each year and how many nights it was actually let. Different rules apply depending on whether the holiday let is in England, Wales, Scotland or Northern Ireland.

The business rates rules are not impacted by the proposed change in tax rules for FHLs from April

iii. Inheritance tax

There is no special treatment for FHL properties for IHT purposes. The market value of any FHL property (net of mortgages) will normally fall within an individual’s estate and will be subject to IHT in full. For an FHL to qualify for business property relief (BPR), it must be evident that the operation of the FHL amounts to a business and is not an investment business, which requires a demonstration of significant services, potentially akin to that of a hotel. HM Revenue & Customs (HMRC) are averse to permitting BPR claims on FHL properties.

Farming partnerships which have an FHL as partnership property which is included on the balance sheet may be successful in claiming BPR where they are mainly trading overall.

Action points on Abolition

1. Allocation of profits

The default position will be that jointly owned property income is split equally for income tax purposes.

Spouses or civil partners can elect to split profits other than 50/50 where the property is jointly owned but beneficial ownership is not equal, and each spouse’s entitlement to income is the same as their share of beneficial ownership.

Where legal title to the property is in the name of one spouse or civil partner Income tax will follow beneficial entitlement. Where the property is subject to debt, any changes to beneficial ownership may give rise to a stamp duty land tax (SDLT) reporting obligation and liability, and the lender should be consulted.

2. Review capital allowance claims

If capital expenditure is being incurred up to April 2025 on qualifying FHL properties then capital allowances can be claimed to that date.

If not all of the expenditure has been relieved, then writing down allowances can be claimed going forward against property income.

It would be worthwhile reviewing historical expenditures to ensure that all qualifying expenditures have been identified and claimed on returns up to date because if not claimed by April 2025, any potential allowances will be lost.

3. Gifting prior to 6 April 2025

Given the ability to gift and with holdover relief being removed from 6 April 2025, some taxpayers are considering whether gifting the property now fits in with their succession plans. If it does, can the gain be fully held over? Note that in order to qualify for holdover, the property must qualify as a FHL at the point of gift.

If a property is gifted now and has qualified as a FHL throughout ownership then there is the option of entering into a joint holdover election with the recipient. This would then mean no CGT arising on the gift and the recipient (e.g. child or grandchild) would take on the transferee’s base cost.

Where the property has not been used as an FHL throughout their ownership or part of the property does not qualify as an FHL then the gain that can be held-over is restricted.

A holdover election is a choice and the taxpayer can choose whether to hold the gain or pay CGT at the 10% rate if they qualify for BADR. Paying some CGT now would mean the family can take on the asset at its current market value. CGT rates are likely to be higher in future and BADR will not be available on future FHL disposals.

If a FHL property is gifted post 5 April 2025 then it will not qualify for holdover relief and there will simply be a disposal for CGT purposes based on the market value at the date of the gift.

4. Incorporation

With mortgage interest restrictions applying from 6 April 2025, this may be more attractive to those with high gearing, or where they are higher or additional rate taxpayers who do not need the rental income stream to meet living expenses. Considerations include:

1. Tax such as CGT and/or LBTT/ADS may be payable on transferring the business. There are ways of minimising or avoiding CGT but LBTT and ADS could be prohibitive.
2. There may be difficulties in getting banks to novate existing mortgages to a company

• Tax efficiency once incorporated – profit extraction etc.

1. Increased compliance costs
2. Increased reporting requirements
3. Sell by 5 April 2025

Given BADR is only available to 5 April 2025, consider whether now is the right time to sell if you were contemplating selling anyway. You may be able to claim BADR (10% CGT on up to £1m gain each) if meet the conditions.

6. Pension contributions

FHL income will no longer form part of the taxpayer’s net relevant earnings for pension purposes from 6 April 2025.

7. Rollover

FHL property is a qualifying asset for rollover relief purposes prior to 6 April 2025 but not afterwards. If a property qualified as a FHL at any point during the taxpayer’s ownership then part of the gain can be rolled over into another qualifying asset.

To qualify for rollover a FHL property would need to be disposed of by 5 April 2025.

8. Do nothing?

Some taxpayers may decide to retain ownership of their FHL and carry on as they are but with an understanding of what the new rules mean for them.

Ongoing uncertainties

The overall headline that FHL property income will be reported as property income from 2025/26 onwards may seem straightforward in principle, but a number of uncertainties remain and the legislation we have is only in draft and could be subject to change.

 

FHLs – The Implications for Companies

The draft legislation issued on 29 July 2024 also impacts on those operating a FHL business via a company.

From 1 April 2025, the FHL income will be taxed alongside any other UK property income in the corporation tax computation. For companies with accounting periods straddling 1 April 2025, the accounting period will need to be apportioned between two separate accounting periods.

Capital allowances

Capital allowances will no longer be available for capital expenditure on furniture or fixtures incurred from 1 April 2025. Companies will simply be entitled to corporation tax relief on property repair costs as a profit and loss account deduction (e.g. replacing a kitchen) and the costs incurred in replacing domestic items (e.g. replacement sofas), not on any initial outlay.

Initial expenditure on any fixtures as well as any other capital improvements will be relieved on a future sale when calculating any corporation tax liability on a capital disposal.

Finance costs

Unlike individuals, companies will not be subject to the mortgage interest restriction following the abolition. Where an FHL is held in a company, full relief will normally be available for the mortgage interest, and this will continue going forward under the planned proposals.

CGT reliefs

In terms of capital gains tax (CGT) reliefs, currently, the company itself cannot claim gift relief and business asset disposal relief (BADR) but the individuals with shares in a company can where the necessary conditions are met.

Following the proposed abolition of the special FHL regime, the shares will no longer qualify for these reliefs and the company itself will be unable to claim rollover relief on any FHL reinvestment from 1 April 2025. Nor will substantial shareholding exemption (SSE) be available in future where shares in a subsidiary are sold on or after 1 April 2025.

Capital allowances

Company FHL owners with existing capital allowance pools can continue to claim writing down allowances on those pools (against their property income) and there will be no deemed disposal or balancing charges as a result of these changes.

Losses

The government have confirmed that FHL losses will be available to be carried forward and treated as though made in the property business.

 

 

The Benefits of MTD

MTD for VAT

MTD for VAT was successfully introduced in 2019, with the smallest VAT-registered businesses finally being mandated into MTD for VAT in 2022.

Craig Ogilvie, HMRC’s director of MTD, claimed that MTD for VAT “has been positively received by many. Around 67% of those users have already reported the potential for mistakes in their record-keeping has reduced since 2022”.

That research found that businesses that kept paper accounting records or used only spreadsheets before MTD for VAT, were more likely to report that the costs of MTD outweighed the benefits.

Businesses that already used fully compatible accounting software were more likely to report that the benefits of MTD outweighed the costs, and those benefits included time reduction for VAT submissions and confidence in getting the tax right.

MTD for Income Tax

MTD for Income Tax is a very different proposition and there is far more effort involved to transition unincorporated businesses, who currently report to HMRC just once a year, to quarterly reporting plus a tax finalisation process.

More effort equals more cost and hence higher accountancy fees under MTD IT. Will HMRC be explaining to clients what they will be getting in return for increased accountancy fees?

HMRC’s idea of the benefits 

1. Reduce the chance of customers making errors, while supporting business productivity.  
2. Ensure customers have up-to-date, accurate information to help with business planning.
3. Move customers’ tax records onto one new system supporting wider improvements so HMRC can deliver a better customer experience.
4. Make sure customers pay the right amount of tax so that more money can go to funding public services and supporting growth across the UK.

Expensive sledgehammer 

Of the four benefits of MTD IT above, only the first two could generate financial savings for the taxpayer. However, those potential savings stem from the digitisation of the business’s accounting records, not from the process of reporting accounting results to HMRC under MTD IT.

It is arguable that the real purpose of MTD IT is to make businesses digitise their accounting functions. The threat is that the business will be in all sorts of trouble with HMRC if they fail to digitise as they won’t be able to submit their tax returns.

 

 

Zero rate VAT for Caravan Owners

The objective is to ensure that the zero-rating of residential caravans continues, by updating the legislation so that the zero rate applies to those which meet all versions of the relevant British Standard published on or after 17 June 2005.

These caravans are designed to be in a fixed position and are used for temporary residential use.

This measure reflects the improved standards in caravan manufacturing as set out in BS3632:2023, including improved thermal transmittances through external structures and improved moisture control to reduce condensation.

The measure will come into force on 30 September 2024. effectively applying a similar VAT treatment to different types of living accommodation

This measure will affect people who buy caravans for residential use and manufacturers, retailers and suppliers of residential caravans.

 

 

Questions?

If you have any questions about any of these, you know where to find us. If you prefer, just give me a ring on 07770 738770 or email me at alan.long@thelongpartnership.co.uk.