At the Spring Budget 2024, the Chancellor announced that the special tax regime for FHLs will be abolished from April 2025.  

FHLs benefit from certain tax advantages compared with other property businesses (see below). These will cease to apply from April 2025 and transitional adjustments are likely to be required (eg, to bring in a disposal value for assets where capital allowances have been claimed). This measure is expected to bring in additional tax receipts of £355m for the government by 2027/28. Draft legislation providing for this measure will be published in due course. It will include an anti-forestalling rule to prevent the obtaining of a tax advantage through the use of unconditional contracts to obtain capital gains relief under FHL rules. 

What is a FHL?

For tax purposes, a furnished holiday let (FHL) is a type of property business that meets certain conditions. Briefly, these require that the property is available to, and is let by short-term visitors on a commercial basis for a minimum amount of days in the year. The FHL has a number of tax advantages compared to other property businesses. While the regime is available to both individuals and companies, the regime is less favourable for companies than individuals.

For individuals, one advantage concerns income tax relief for interest. For the typical residential property letting business, tax relief for finance costs is given as a reduction in the person’s income tax liability, capped at 20%. For the FHL, however, the interest may be deducted in calculating the person’s profits. This could save income tax at a higher rate (eg, 45% where the person pays income tax at the additional rate in England, Wales and Northern Ireland).

Other tax advantages include the following:

• capital allowances may be claimed on plant and machinery;
• income from the business is earned income for the purposes of making pension contributions; and
• various capital gains tax reliefs.

For example, business asset disposal relief (BADR) may apply on the sale of the property. This means that any gain falling within the individual’s lifetime BADR limit (currently £1m) can be taxed at a 10% rate rather than 28% (or 18% for a basic rate taxpayer). It was also announced at the Budget that the higher capital gains tax rate for property disposals would reduce from 28% to 24% from 6 April 2024.

FHL: boundary between lettings and a trade

The FHL rules were introduced in 1982/83, in part to provide certainty of tax treatment following a number of tax cases concerning whether a short-term holiday rental business should be treated as a trade for tax purposes. The legislation deems the FHL to be a trade for the purposes of the specific tax rules mentioned above.

In its 2022 property income review, the Office of Tax Simplification considered that, if the FHL regime was abolished, a statutory “Brightline” test may be required to define when a property trading business is being carried on.  A “brightline” test would also be helpful for IHT purposes and might reduce the number of business property relief related disputes.

Caroline Miskin, Senior Technical Manager, ICAEW Tax Faculty said “it will be interesting to see whether this change does actually encourage landlords to move to longer term lets. The change appears to be a simplification of the tax system but could result in disputes and tribunal cases over whether a lettings business constitutes a trade.

“Some landlords may wish to reconsider whether to incorporate but that is a decision that needs expert and specific tax advice. We don’t know whether MTD ITSA considerations were a factor in deciding to make this change, but it certainly simplifies the design as the quarterly filing obligations will now match the data feeds and there will not need to be a reworking if a property loses or acquires FHL status during the year.”

Changes to stamp duty land tax multiple dwellings relief in England and Northern Ireland

The government consulted on potential changes to the mixed property rules and multiple dwellings relief (MDR) at the end of 2021. Following a two-year wait for the outcome of that consultation, it was announced that that MDR will be abolished in England and Northern Ireland from 1 June 2024. The proposed apportionment method for calculating the tax on mixed-property purchases will not go ahead.

Property transactions with contracts that were exchanged on or before 6 March 2024 will continue to benefit from MDR regardless of when they complete. The same will apply to other purchases that are completed before 1 June 2024. Special transitional rules also apply to linked transactions so that transactions occurring after abolition of MDR cannot be treated as linked to earlier transactions, where tax was calculated in line with the MDR rules.

The government will engage with the agricultural industry to determine how the sector is affected by the abolition of MDR. 

Other SDLT changes from 6 March 2024 include:

• protecting registered providers of social housing in England and Northern Ireland from a charge when purchasing property with a public subsidy;
• exempting public bodies from the 15% SDLT rate; and
• two changes to the first-time buyers' relief rules involving the grant of a new lease via a nominee or bare trust.

Further reading

• ICAEW REP 18/22 Stamp Duty Land Tax: Mixed-property Purchases and Multiple Dwellings Relief
• Stamp Duty Land Tax: Abolition of Multiple Dwellings Relief from 1 June 2024
• Stamp Duty Land Tax: mixed-property purchases and Multiple Dwellings Relief
• Stamp Duty Land Tax Relief for Multiple Dwellings evaluation
• Stamp Duty Land Tax: change to rules for acquisitions by registered social landlords and public bodies
• Stamp Duty Land Tax: First-time Buyers’ Relief