FHLs On Shaky Ground With Capital Allowances

Furnished Holiday Lettings

Unfortunately, owners of Furnished Holiday Lets (FHLs) were dealt a blow in the 2024 Spring Budget.    The announcement of the FHLs regime’s abolition from April 2025 removing tax relief via capital allowances.

This move by the Government removes the tax advantages, including capital allowances, previously enjoyed by FHLs compared to standard residential property rentals. The aim being to create a more level playing field and potentially free up housing for long-term tenants.  However, the details remain hazy, leaving many FHL owners with questions.

Uncertainties Cloud the Future

The initial announcement in the budget was brief, offering little clarity on the specifics of the transition. Key questions remain unanswered, such as:

  • How will capital allowances from former FHLs be treated after the regime’s end?
  • Will there be any grandfathering measures for existing FHL owners?
  • How will the boundary between an investment and trading be set?

The removal of the FHL regime means transitional measures will be needed for capital allowance pools and the treatment of unused losses. Whether this will allow for grandfathering of existing claims much like the phasing out of Industrial Buildings Allowances (IBAs).

However, what ever approach is taken, guidance will hopefully be issued sooner rather than later to mitigate the uncertainty.

The abolition of the regime also brings with it further uncertainty to the boundary of what is an investment and what is a trade. Determining whether an FHL will be classified as a “trade” can be complex.

In the 80s, the cases of Gittos v Barclay, Griffiths v Pearman and Griffiths v Jackson, and more recently Julian Nott v HMRC [2016] UKFTT 106 (TC) established that the carrying on of a self-catering business did not meet the requirements of a trade.  And following these 80’s cases and for other reasons the FHL legislation was introduced.

Unfortunately without the regime, self-catering is what many FHL properties may become.  This is  unless the services offered are more significant than changing beds and providing meals now and again.

In addition to avoid costly disputes and an added administrative burden, the definition brought in to define what is a trade and what is a rental business, needs to be concise and robust .

New Fixtures Rules

Anti-Forestalling Measures: A Foray Into The Unknown

The announcement did make mention of the publication of draft legislation.  This is to include an “anti-forestalling rule” in relation to Capital Gains Tax (CGT).  This rule would be effective from 6 March 2024. The anti-forestalling rule aims to prevent a last-minute scramble to obtain tax advantages by the use of unconditional contracts before the regime ends.

But how to you comply with the forestalling rule, when no details have been published to follow? We hope HMRC will be lenient when dealing with CGT issues.

What Now for FHL Owners In Terms Of Capital Allowances?

We advise not to make any knee jerk decisions about your property, that may lead to disposal events. However, while details are scarce, you as a FHL owner can take some steps to navigate this period of uncertainty:

  • Seek professional advice: Consulting with a capital allowances consultant specialising in property can help you understand the potential impact and explore options.
  • Review your portfolio: Re-analyse all of your expenditure to understand if you have claimed all available tax reliefs eg Plant and Machinery Allowances, Structures and Buildings Allowances, Land Remediation Relief, R&D Allowances, R&D Relief
  • Stay informed: Closely follow government pronouncements and industry updates for any further details on the transition.

If you should decide that selling your property is the right decision, seek the advice of a capital allowances specialist early, especially if you have claimed. This will ensure that the necessary and appropriate clauses and elections will be put in place. It will also ensure that there is no clawback of tax, safeguarding your tax position.

All these uncertainties are creating a period of flux for FHL owners.  It is making it difficult to plan for the future. The removal of the FHL regime is a significant change for the short-term rental market. While the full picture remains to be seen, proactive decision-making and staying informed will be crucial for FHL owners in the coming months.

More about FHLs and capital allowances can be found here on our site.

Due diligence on Capital Allowances