The end is nigh for furnished holiday lets!
14th March 2025
Posted in Articles by Andrew Marr
This month marks the end of the road for the Furnished Holiday Lettings (‘FHL’) regime. Under the FHL rules, individuals and companies letting residential properties on a short-term basis were classed as carrying on a trade for various tax purposes, subject to meeting certain criteria. This had several advantages such as:
- Business Asset Disposal Relief (‘BADR’) was available on the sale of the business.
- Access to the more generous capital allowances regime when carrying out improvements to the property.
- Full relief for mortgage interest costs (higher rate tax relief for these is generally restricted for individual and partnership landlords but not where FHL applies).
We discussed the impact of these changes in an earlier tax bite here. However, there still seems to be confusion around the availability of BADR.
Claiming BADR
When the changes were first announced, the government stated that FHL business owners could continue to claim BADR on disposals up to 5 April 2025. After that date, BADR will continue to apply only where the FHL business ceased on or before 5 April 2025 and the property is disposed of within three years of the date of cessation.
Some people have questioned whether continuing to rent the property on a long-term let after 5 April 2025 – which would never have qualified for FHL status – would be permissible without jeopardising a claim for BADR in the three-year period. The logic here would be that the FHL activity would be deemed to have ceased on 5 April 2025 due to the change in rules.
Unfortunately, HMRC take the view that carrying on the business as an ordinary lettings business after 5 April 2025 will prevent BADR being claimed. This was clarified in an article they published which says:
“Cessation of business
The repeal of FHL provisions does not mean that FHL businesses have ceased, it merely disapplies the relevant legislation. The affected businesses will be continuing property businesses, until there is an actual cessation of business activity. Where legislation refers to the cessation of business, it means an actual cessation of business activity. The date of cessation is not the date that further bookings stop being taken, it is the date from which there are no longer any bookings or lettings nor any intention to resume such activity in future. To benefit from capital gains reliefs beyond April 2025, the business has to cease before 1 April 2025 for Corporation Tax or before 6 April 2025 for Income Tax and Capital Gains Tax purposes.”
Consequently, any FHL owners who wish to benefit from BADR on a sale of their property after 5 April 2025 must pull up the shutters by that date.
Forbes Dawson view
The above interpretation hinges on the nuanced wording of the BADR rules. For unincorporated businesses, BADR is only available to trades. FHLs are afforded trading status despite the fact they would be ordinarily treated as investment activity. However, the ability to qualify for BADR in the three-year period following cessation refers to the “business” ceasing, and not the trade. Therefore, continuing to carry on the business – even though it no longer classes as a trade – would be deemed to fall foul of the rules according to HMRC. Any individual FHL owners who are looking to ‘get out of the game’ may therefore want to consider undoing any holiday rentals that they have booked in for after 5 April.
The position should be contrasted with the rules for disposals of companies. In this case, an individual has three years from the date of the company “ceasing to be a trading company” to disposal of the shares and qualify for BADR. Consequently, FHL activity carried on through a company which continues the business of renting the properties on or after 1 April 2025 would, on the face of it, be able to benefit from BADR for up to three years from that date (assuming it was deemed to cease to be a trading company from that date).
The rate of capital gains tax applying to BADR disposals will increase on 6 April 2025 from 10% to 14%. A further increase from 14% to 18% will apply from 6 April 2026. The benefit of continuing to rent the property should therefore be weighed up against any additional tax that would be due by delaying disposals.
