Furnished Holiday Lets – HMRC Clarifies Capital Allowances Position and More

HMRC Updates the tax position for FHLs

The following has been reproduced from the website for the “Institute for Chartered Accountants in England and Wales” (ICAEW)

HMRC has published clarifications on the draft legislation introduced to cover not only Capital Allowances and Furnished Holiday Lets but many other tax considerations as well.

Abolition of FHL tax rules

On 29 July 2024, the government published draft legislation for consultation, which provides for the abolition of FHL tax rules from April 2025. In its response to the consultation in September, ICAEW’s Tax Faculty raised a number of issues where clarification was needed. 

HMRC has now published further guidance which addresses many of those points. In particular, HMRC has made it clear that the intention is to remove the specific tax reliefs currently available for FHLs and not to change other rules. The guidance confirms, for example, that holiday accommodation, whether previously qualifying as an FHL or not, remains standard-rated for VAT.

Capital allowances and s198 elections

The general rule is that capital allowances cannot be claimed for expenditure incurred on items for use in a dwelling (s35, Capital Allowances Act (CAA) 2001), but this does not apply to FHLs. Transitional rules will apply on the abolition of the FHL regime so that capital allowances can still be claimed on expenditure included in a capital allowances pool by 1 April 2025 for corporation tax and 5 April 2025 for income tax.

The faculty had asked HMRC to explain how the transitional rules will apply where an election is made under s198, CAA 2001 to fix the amount allocated to fixtures on the sale of a property. HMRC has confirmed that the expenditure allocated to fixtures will not qualify for capital allowances in the hands of the purchaser if s35, CAA 2001 applies (ie, the fixtures are for use in a dwelling). 

FHLs commencing in 2024/25

On commencement, FHL status is determined by reference to the 12 months from when the property is first let as furnished holiday accommodation, rather than the 12 months from the start of the tax year/accounting period. How this will work once the FHL rules are repealed (ie, would a new business take account of the part of the 12-month period falling after 1/6 April 2025)?

HMRC has confirmed that this will be the case. Where a business commences in 2024/25, the relevant period for the purposes of the occupancy conditions begins on the first day in the tax year (or accounting period) in which letting commences and may extend past April 2025. 

Business cessations

The faculty had expressed concern that a lack of clarity around business cessations and the rules for capital gains tax (CGT) relief may lead to disputes. In particular, the faculty asked HMRC to clarify if:

• business asset disposal relief will continue to be available for three years where an FHL business ceases in 2024/25 on taking in a long-term tenant; and
• the abolition of the FHL rules will itself be treated as a business cessation.

HMRC has confirmed that “where legislation refers to the cessation of business, it means an actual cessation of business activity”.  HMRC says that the date of cessation is “the date from which there are no longer any bookings or lettings nor any intention to resume such activity in future”, and that to benefit from CGT reliefs beyond April 2025, the business had to cease before then.

The guidance also confirms that HMRC does not consider that the repeal of the FHL tax rules means that an FHL business has ceased.

Jointly owned property

The FHL rules tax married couples and couples in a civil partnership who own property jointly on their share of the income from the property. However, once the FHL rules have been abolished, couples will be taxed 50:50 unless they have a Form 17 in place. Form 17 can be used where the property is held in unequal shares. 

The faculty welcomes that HMRC’s guidance draws attention to this. The faculty had suggested that HMRC promote awareness of the issue so that couples have time to consider completing Form 17 before the changes take effect.  The faculty had also urged HMRC to consider extending the 60-day period for couples to submit the form, but this has not been done. 

CGT and anti-forestalling

Clause 14 of the draft legislation includes an anti-forestalling rule, which is intended to prevent a CGT advantage through the use of unconditional contracts. HMRC’s guidance explains that where a contract is made on or after 6 March 2024, and the disposal takes place on or after 6 April 2025, CGT relief will not apply unless the claim includes a statement confirming that the conditions in the draft legislation are met. 

In simple terms, the draft legislation requires that either: 

• the purpose of entering into the contract was other than to avoid the changes made in connection with the abolition of the FHL regime; or
• the contract was entered into by unconnected parties wholly for commercial reasons.