Background

Special tax rules apply where a property business qualifies as an FHL. This has the following advantages for individual taxpayers: 

• qualifying interest can be deducted in calculating the taxable income from the FHL, rather than having to apply the finance cost restriction rules; 
• capital allowances can be claimed for some capital expenditure;
• capital gains tax relief (CGT) reliefs may be available on the disposal of the property; and
• FHL profits are taken into account when calculating maximum pension relief.

At the Spring Budget 2024, the then Conservative government announced that it would abolish the FHL regime from 1 April 2025 for corporation tax and 6 April 2025 for income tax and CGT.  

On 29 July 2024, the Labour government confirmed that it would proceed with the measure, and provided more details in the form of draft legislation, an explanatory note and a policy paper. 

The need for a ‘brightline’ test

ICAEW is concerned that the abolition of the FHL regime creates uncertainty as to whether a short-term holiday rental business should be treated as a trade for tax purposes. On 20 March 2024, ICAEW wrote to HMRC calling for the introduction of a ‘brightline’ test in the legislation to clarify the distinction between property letting and trading. This request was rejected by HMRC. 

In its representation on the draft legislation, ICAEW has asked HMRC to reconsider introducing a statutory test. If this request is denied, ICAEW has called for an urgent review of HMRC’s guidance. 

Preparing for the changes

The abolition of the FHL rules will have many knock-on impacts for the taxpayers affected. ICAEW recommends that HMRC issues guidance covering, and raises awareness of, the potential impacts of the changes.    

In particular, ICAEW believes that guidance is needed which confirms the position regarding capital allowances elections, and that the abolition of the FHL rules does not change the VAT treatment (ie, the provision of holiday accommodation remains standard rated).   

ICAEW has also raised issues affecting taxpayers who own property jointly with a spouse or civil partner. Under the FHL rules, such taxpayers are taxed by reference to their share of the property. From 6 April 2025, such taxpayers will be taxed 50:50 unless there is a Form 17 in place. ICAEW has suggested that the strict Form 17 requirements should be relaxed in this instance.   

Concerns with the draft legislation

ICAEW has asked the government to clarify:

• how the commencement rules will apply with regard to new FHL businesses that start in 2024/25, and claims for CGT roll-over relief; and
• how CGT business asset disposal relief will apply for business cessations, (eg, is the abolition of the FHL rules itself a deemed cessation)?

ICAEW has also questioned whether the CGT anti-forestalling rule is fair, and if the legislation relating to expenditure incurred on energy-saving items could be removed. 

Further information

• ICAEW representation 68/24 FHL tax regime abolition