Sarah Bradford outlines the implications for landlords of the end of the furnished holiday lettings tax regime and asks if it is worth selling before 6 April 2025 to benefit from the existing capital gains tax reliefs.
When it comes to letting residential property, not all property is equal in tax terms – lettings that qualify as ‘furnished holiday lettings’ (FHLs) benefit from special tax rules.
All good things…
One of the main advantages is that landlords with FHLs are able to deduct interest and finance costs in full in calculating the taxable profits for their FHL property business. In addition, properties that qualify as FHLs are able to benefit from the capital gains tax (CGT) reliefs that are available to traders. The landlord is also able to claim capital allowance for items such as furniture, fixtures and fittings, and equipment. Again, this is not available to landlords of residential lets.
A further benefit of investing in a FHL is that profits count as earnings for pension purposes.
However, this regime is to come to an end on 5 April 2025. For 2025/26 and onwards, FHLs will be taxed in the same way as for other holiday lettings. Consequently, landlords with FHLs only have a limited time to benefit from the tax advantages associated with FHLs.
Qualifying as an FHL
A landlord can only benefit from the tax advantages associated with the FHL regime if the letting meets the definition of an FHL for tax purposes. It is not enough to simply let the property as holiday accommodation.
As the name suggests, the property must also be let furnished to qualify as an FHL. This means that there must be sufficient furniture in the property for it to be used normally, and people renting the property for a holiday must be allowed to use the furniture. The property must be let commercially with a view to making a profit.
The property must also satisfy three occupancy conditions:
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the availability condition;
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the letting condition; and
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the pattern of occupancy condition.
For a new letting, the tests are applied for the first 12 months from the date the property was first let as an FHL. For continuing lettings, the tests are applied on a tax-year basis – from 6 April to the following 5 April. If the landlord stops letting the property as an FHL, for the final period the tests are applied to the last 12 months of letting.
The availability condition is met if the property is available for letting as commercial holiday accommodation to the public generally for at least 210 days in the year. Any days when the landlord stays at the property are ignored.
The letting condition is met if the accommodation is commercially let as a holiday letting to members of the public for at least 105 days in the year. Lettings of more than 31 days are ignored when working out whether this condition is met.
The pattern of occupancy condition is met as long as not more than 155 days in the tax year are periods of longer-term occupation. A period of ‘longer-term occupation’ is a period of more than 31 days where the property is let to the same person or persons.
Failure to meet the letting condition
If, in a particular tax year, the landlord fails to meet the letting condition but meets the availability condition and the pattern of occupation condition, the property may qualify if the landlord makes either an averaging election or a period of grace election.
An averaging election can be made by a landlord who has more than one holiday letting and the letting condition is met in some but not all of them. Under an averaging election, the letting condition is assessed by reference to the average rate of occupancy for all properties rather than individually for each property.
To make a period of grace election, the landlord must have genuinely intended to let the property and the property met the letting condition (either on its own or because of an averaging election) in the previous year.
Selling before 6 April 2025 to benefit from CGT relief
One of the main advantages of the FHL regime is that landlords are able to access some of the CGT reliefs available to traders. However, these will cease to be available from 6 April 2026, following the ending of the FHL regime.
In light of this, FHL landlords who are considering selling their property in the not-too-distant future, or who own a property that is pregnant with gain, may wish to consider selling the property before 6 April 2025 to access the existing reliefs. It should be noted that the legislation features anti-avoidance provisions to prevent the use of unconditional contracts to seek to preserve the availability of relief for completions beyond 5 April 2025.
Business asset rollover relief
Business asset rollover relief allows any CGT due on the sale of an FHL to be deferred where the proceeds are invested in a business asset (e.g., another holiday letting). Where the full proceeds are reinvested, the gain arising on the disposal is generally deducted from the base cost of the new asset, increasing the gain when that asset is sold.
If only part of the proceeds are reinvested, the gain attributable to the reinvested portion is rolled over and the remainder (relating to the proceeds not reinvested) is immediately chargeable.
To qualify for the relief, the new property must be purchased in the period spanning 12 months before and three years after the sale of the old property. The relief must be claimed within four years from the end of the tax year in which the new asset was purchased. The claim is made on form HS290.
Business asset rollover relief is beneficial where the landlord wishes to reinvest as the sale proceeds are not immediately reduced by CGT, leaving more funds available to fund the reinvestment.
Business asset disposal relief
Business asset disposal relief (BADR), previously known as entrepreneurs’ relief, allows a gain to be taxed at the preferential rate of 10% up to a lifetime limit of £1m.
The relief is available to an unincorporated landlord where the business is sold and the landlord had owned the business for at least two years previously. It also applies if the business is closed down and the business assets are sold within three years following the date on which the business ceased.
Gift holdover relief
The final CGT relief which is available to FHL landlords is gift holdover relief, which is beneficial if the landlord wishes to give the property away or sell it for less than it is worth (e.g., in order to pass it on to their children).
For CGT purposes, where an asset is disposed of to a connected person, the gain is calculated by reference to the market value of the asset rather than the amount that the recipient pays for it (if anything). Where a property is given away, this may mean that there is a hefty tax bill to pay, but no proceeds from which to pay it. Gift holdover relief overcomes this by allowing the gain to be deferred by reducing the recipient’s base cost.
Beyond April 2025
The CGT reliefs will cease to apply to FHLs once the favourable regime comes to an end on 5 April 2025. Disposals after that date will be subject to the normal CGT rules for residential property and the usual rates of 18% and 24% will apply. Residential property gains must be reported to HMRC and the tax paid within 60 days of the completion date. Consequently, disposing of a holiday letting prior to the end of the FHL regime may be worthwhile.
Landlords who have a mortgage on their FHL will no longer be able to deduct the interest and finance costs in full in calculating their profit. Instead, they will be able to deduct up to 20% of those costs from the tax due on their profits, as relief for residential lets is given in the form of a basic rate tax reduction rather than as a deduction.
Practical tip
Landlords with FHLs should assess whether it is worth disposing of their property before 6 April 2025 to benefit from the CGT advantages currently available to FHLs.
