Following proposed changes, many tax reliefs will be removed from furnished holiday lettings.
Accountant Saffery has reminded farmers with diversified businesses that new changes will come into effect for furnished holiday lettings (FHLs) rules from April 2025.
It comes as the government released a policy paper setting out the proposed changes to the tax rules for FHLs for inclusion in Finance Bill 2024-25.
Until April 5 2025, a property that qualifies as a FHL can benefit from various tax reliefs not generally available to rental property businesses.
However, following the proposed changes, many of these tax reliefs will be removed, which will impact farmers with FHLs, Saffery says. In terms of income tax, so in cases where properties are owned by individuals or through a partnership, the headline is that up until April 5, 2025 full relief can continue to be obtained for finance costs.
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From April 6, 2025 onwards, Saffery explains that former FHLs will be treated in the same way as residential let property and the usual finance cost restrictions will apply.
Capital allowances are currently available for an individual’s FHL business and can be claimed for costs of providing furniture and equipment such as cookers, washing machines and beds although where the property is used for private purposes these allowances are restricted.
Profits from a FHL are currently treated as earned income for the purposes of pension contributions. This will be removed from April 6, 2025.
Director at Saffery, Lucy de Greeff, says: “Where rural businesses and landed estates have properties which are currently classified as FHLs, the recently-released policy paper provides some clarity.
“Property owners may wish to take the opportunity to forecast the impact of the changes to finance cost relief and capital allowances into annual budgets.
“There may also be an opportunity to review the use of the properties.
There are some further rules for cases where FHLs are owned through a corporate structure and are therefore chargeable to corporation tax.”
For capital gains tax (CGT) purposes, the reliefs that are currently available in relation to FHLs - including business asset disposal relief, rollover relief and business asset gift relief - will no longer be available from April 6, 2025.
However, some transitional rules will apply.
Ms de Greeff explains: “There may be an opportunity for some property owners to take advantage of these reliefs prior to April 5, 2025, although advice should be sought as the rules are complex.
“It is also worth noting that the use of unconditional contracts to obtain CGT reliefs under the current rules will fall foul of an anti-forestalling rule, which applies from March 6, 2024.”
On Inheritance tax (IHT), the government’s proposal is silent. However, if FHLs are to be treated as part of a property business going forward it could be assumed that this will remove any ability to claim BPR on a FHL business in the future.
Another issue that will affect owners of FHLs under the new rules from next April is how losses can be used, Saffery says.
After April 5, 2025, former FHL properties will form part of a person’s property business which will then include the amalgamated profits and losses of all the properties in that business.
Where losses have been brought forward from an FHL business, under the new rules these can continue to be carried forward to be offset against future years profits of a property business.
Finally, for VAT purposes, Saffery says the provision of holiday accommodation is subject to VAT regardless of whether the property qualifies as an FHL for other tax purposes or not.
The income received from supplies of holiday accommodation forms part of a trader’s taxable turnover and is therefore relevant when determining whether a liability to register for VAT has arisen and will arise in the future.
Lucy de Greeff said: “Care will be needed to ensure that any current tax reliefs are maximised and the transition to reporting in line with other property income and gains is done correctly.
“Taxpayers should consider seeking advice well ahead of April 2025 if they currently hold a FHL and would like to review any planning opportunities.”
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