This article, "Time to bid farewell to the FHL regime," originally appeared on AccountingWeb.com.
In the March 2024 Budget, the then Chancellor Jeremy Hunt announced that the furnished holiday lettings (FHL) regime would be abolished with effect from April 2025. Draft legislation was promised “in due course” and we were told that it would include an anti-forestalling rule that would apply from 6 March 2024 to prevent the obtaining of a tax advantage through the use of unconditional contracts to obtain capital gains relief under the current FHL rules.
That was all we were told about the anti-forestalling rule which, as the Chartered Institute of Taxation’s representation back in March said, created a situation where “it is obviously difficult for taxpayers to comply with provisions in force that have not been published and such an approach seems contrary to the Charter commitment to help taxpayers meet their tax responsibilities”.
On 29 July, the incoming government confirmed its intention to press ahead and tabled a policy paper together with draft legislation (including the anti-forestalling rule) and an explanatory note.
Draft legislation
The draft legislation will, from 6 April 2025 (1 April 2025 for companies), serve to:
- apply the finance cost restriction rules so that loan interest relief will be restricted to basic rate for income tax
- remove the capital allowances rules for new expenditure and instead allow relief for replacement of domestic items
- withdraw access to reliefs from taxes on chargeable gains for trading business assets
- no longer include FHL income within relevant UK earnings when calculating maximum pension relief.
There will be some transitional rules.
- Where an existing FHL business has an ongoing capital allowances pool of expenditure, it will be able to continue to claim writing-down allowances on that pool. This allays the concern some had expressed that there could be a balancing charge on cessation of the FHL rules. Any new expenditure incurred on or after the operative date will fall to be relieved under the general property business rules.
- The current rule requires a loss on FHL income to be carried forward and set against future profits from the same FHL business. Any such unrelieved loses at the date of change will be carried forward and amalgamated with non-FHL losses (distinguishing UK and non-UK property income).
- Eligibility for roll-over relief, business asset disposal relief (BADR), gift relief, relief for loans to traders, and exemptions for disposals by companies with substantial shareholdings will cease, but – and it is an important but – “where criteria for relief includes conditions that apply in a future year these specific rules will not be disturbed where the FHL conditions are satisfied before repeal”.
- Where the BADR conditions are satisfied in relation to a business that ceases prior to the commencement date (1 or 5 April 2025), relief may continue to apply to a disposal that occurs within the normal three-year period following cessation of the business.
Anti-forestalling rule
We also now know exactly how the anti-forestalling rule is designed to operate.
The rule is intended to counteract forestalling arrangements that aim to lock-in the application of the FHL rules where an asset is disposed of under an unconditional contract entered into on or after 6 March 2024, but the asset is conveyed or transferred (and so the contract completed) on or after the commencement date. In that situation, the abolition rules apply to the disposal for capital gains purposes if a “relevant claim” is made for the disposal. A relevant claim is a claim or provisional declaration for replacement business asset roll-over relief, a claim for gift of business asset relief, or a claim for business asset disposal relief.
This is subject to two exceptions, for which a statement is required to be made with the claim. These are 1) when the contract was entered into wholly for commercial reasons, or 2) the parties to the contract are not connected persons; and in either case no purpose of the contract was to avoid the amendments made in respect of the changes relating to capital gains applying to the disposal.
Planning ahead
Now that we know the new government intends to press ahead with abolishing the FHL rules next April and have draft legislation (including the anti-forestalling rule) it will at least be possible to give firm advice to clients. It will be especially important to consider situations where there are held-over or rolled-over gains or where it has been assumed that BADR would be available.
Some husband-and-wife partnerships will have taken advantage of the fact that they have been able to split profits from an FHL business as they agree – once the changes take effect, the situation will default to the 50:50 and Form 17 position applicable to property rental businesses generally.
The FHL regime has been a familiar part of the tax landscape for 40 years. After a near-death experience in 2009, it would appear that this time there will be no reprieve.