From April 2025, the present tax breaks enjoyed by owners of Furnished Holiday Lets (FHLs) will cease and FHL income and gains will be taxed in the same way as other property businesses.

Currently, FHL owners benefit from tax advantages, as compared to non FHL owners, in four key areas:

• exemption from finance cost restriction rules (which restrict loan interest to the basic rate of Income Tax for other landlords);
• more beneficial capital allowances rules;
• access to reliefs from taxes on chargeable gains for trading business assets; and
• inclusion as relevant UK earnings when calculating maximum pension relief.

According to HMRC, the distinction for a furnished holiday let was introduced in 1984 and provided different and more beneficial tax treatment for short-term lettings within the property investment sector. Repealing the beneficial tax treatment for furnished holiday lettings promotes fairness by removing the tax advantages that furnished holiday let landlords have over other residential property landlords.

From April 2025

These tax changes will take effect from 6 April 2025 for income tax and capital gains tax (CGT) purposes, and from 1 April 2025 for corporation tax on corporate income and gains.

The changes will remove the tax advantages that current FHL landlords have received over other property businesses in 4 key areas by:

• applying the finance cost restriction rules so that loan interest will be restricted to basic rate for Income Tax;
• removing capital allowances rules for new expenditure and allowing replacement of domestic items relief;
• withdrawing access to reliefs from taxes on chargeable gains for trading business assets; and
• no longer including this income within relevant UK earnings when calculating maximum pension relief.

After repeal, former furnished holiday let properties will form part of the person’s UK or overseas property business and be subject to the same rules as non-furnished holiday let property businesses.

Transitional arrangements

According to HMRC the following transitional arrangements will apply:

• Businesses with FHL properties will no longer be eligible for more beneficial capital allowances treatment but will instead be eligible for ‘replacement of domestic items relief’ in line with other property businesses. Where an existing FHL business has an ongoing capital allowances pool of expenditure, they can continue to claim writing-down allowances on that pool. Any new expenditure incurred on or after the operative date must be considered under the property business rules.
• Under current rules a loss generated from a FHL property business can only be carried forward and used against future profits of that same FHL business. After the changes, former FHL properties will be part of the person’s UK or overseas property business as appropriate, that property business will then include the amalgamated profits and losses of all the properties in that business.
• Persons may have losses to carry forward from their FHL business after repeal. Losses generated from this FHL business will be permitted to be carried forward and be available for set off against future years’ profits of either the UK or overseas property business as appropriate.
• Under current rules FHL properties are eligible for roll-over relief, business asset disposal relief, gift relief, relief for loans to traders, and exemptions for disposals by companies with substantial shareholdings. After the changes eligibility for the reliefs will cease, however, 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.
• In relation to business asset disposal relief, where the FHL conditions are satisfied in relation to a business that ceased prior to the commencement date, relief may continue to apply to a disposal that occurs within the normal 3-year period following cessation.
• There is also an anti-forestalling rule which will prevent the obtaining of a tax advantage through the use of unconditional contracts to obtain capital gains relief under the current FHL rules. This rule applies from 6 March 2024.

Opportunity knocks

Which means between now and April 2025 there is still time for present FHL owners to capitalise on the current, generous tax breaks.

To see how you could benefit, if you own FHL properties, please call so we can help you consider your options. And don’t forget, many of these options will close April 2025.

The following notes are copied from draft legislation published by HMRC, to be included in the Finance Bill 2024-25.

• As of 1 January 2025, all education services and vocational training supplied by a private school, or a “connected person”, for a charge will be subject to VAT at the standard rate of 20%. Boarding services closely related to such a supply will also be subject to VAT at 20%.
• Any fees paid from 29 July 2024 pertaining to the term starting in January 2025 onwards will be subject to VAT.
• Where pupils are placed in a private school because their needs cannot be met in the state sector, and they have their places funded by their Locally Authority (LA), a devolved government, or a nondepartmental public body, their funder will be compensated for the VAT they incur on these pupils’ fees.
• The government will legislate to remove eligibility of private schools in England to business rates charitable rates relief. However, the government recognises some pupils have special educational needs that can only be met in a private school. Therefore, the government will consider how to address the potential impact of these changes in cases where private school provision has been specified for pupils through an Education, Health and Care Plan (EHCP) – a plan given to children and young people who need more support than is available through special educational needs (SEN) support.
• The policy intention is for nurseries (both standalone nurseries and those attached to a private school) to remain exempt, and for the fees of children in the first year of primary school in a private school upwards to become taxable. This is the year in which children turn compulsory school age, often referred to as “reception” in England and Wales, “Primary 1” in Scotland, and “Year 1” in Northern Ireland.
• Education and vocational training provided either at sixth forms attached to private schools or standalone private sixth form colleges will also be subject to VAT. This is to ensure parity of tax treatment between further education supplied at sixth forms attached to private schools catering to children of compulsory school age (which are captured by the above definition of a private school), and those private sixth form colleges that only provide education to pupils aged 16-19. The legislation is also drafted in this way to ensure that private schools are not incentivised to artificially separate their sixth forms from the parts of their school catering to children of compulsory school age.
• Other “closely related” goods and services other than boarding (i.e. goods and services that are provided by a private school for the direct use of their pupils and that are necessary for delivering the education to their pupils) will remain exempt from VAT.

As set out in the draft legislation, “private schools” are defined as schools at which full-time education is provided for pupils of compulsory school age or, in Scotland, school age (whether or not such education is also provided for pupils under or over that age), or an institution at which full-time education is provided for persons over compulsory school age but under 19 and which is principally concerned with providing education suitable to the requirements of such persons (for example, a sixth form college), and where fees or other consideration are payable for that provision of full-time education.

Education and boarding provided by state schools (including academies) are not affected by this policy change, meaning they will continue to be exempt from VAT. This reflects the fact that state schools and academies will continue to be “eligible bodies”.

In a recent announcement to parliament, the Chancellor confirmed the current year deficit in the government finances of £22bn.

She set out some of the reductions in public expenditure to close the deficit but hinted that there may be tax increases required to balance the books.

Specific measures announced

Aside from requesting budget savings from her ministerial colleagues, Rachel Reeves confirmed the following:

• The winter fuel payments from now on will only be sent to persons claiming pension credits or other means-tested benefits.
• VAT at 20% will be added to private independent school fees for terms commencing after 1 January 2025. This will also include fees paid in advance, on or after 29 July 2024, for 2025 fees.
• From April 2025 the favourable tax treatment of Furnished Holiday Let (FHL) properties are to be abolished. From this date, FHL properties will be treated the same as other property businesses.
• From April 2025, the government will remove the outdated concept of domicile status from the tax system and implement a new residence-based regime which is internationally competitive and focused on attracting the best talent and investment to the UK. The government will implement the 4-year foreign income and gains (FIG) regime announced by the previous government at the Spring Budget. However, this approach left several advantages for existing non-doms, which the government is committed to ending. The government will also review other key areas of the previously announced reforms to ensure the new regime is both fair and as competitive as possible.

The Chancellor also re-confirmed that the basic, higher and additional rates of income tax, National Insurance rates and VAT will NOT be increasing.

Which taxes could be increased?

With income tax, National Insurance and VAT taken out of the equation, there are still numerous taxes that could be increased.

With a promise to avoid taxing working families, tax increases are likely to focus on CGT and Inheritance Tax.

For example, it would be a fairly simple matter to treat capital gains as income and charge tax at the highest marginal income tax rates rather than the present lower CGT rates.

The Chancellor could also reduce or withdraw the generous Business and Agricultural IHT reliefs or withdraw or reduce the seven year Potentially Exempt Transfer relief.

She could also reduce the tax relief for making an individuals’ pension contributions or level up the tax charge on dividends.

Beat the Budget increases

As it is not normal practice to back-date tax increases, any changes announced in the forthcoming budget will apply, at the earliest, from 30 October 2024 (the autumn budget date).

Which means taxpayers have three months to bring forward transactions that may fix their CGT and IHT liabilities based on current legislation.

Readers who would like to consider their options are invited to call and organise a formal fact-find session.

1 August 2024 – Due date for corporation tax due for the year ended 31 October 2023.

19 August 2024 – PAYE and NIC deductions due for month ended 5 August 2024. (If you pay your tax electronically the due date is 22 August 2024)

19 August 2024 – Filing deadline for the CIS300 monthly return for the month ended 5 August 2024.

19 August 2024 – CIS tax deducted for the month ended 5 August 2024 is payable by today.

1 September 2024 – Due date for corporation tax due for the year ended 30 November 2023.

19 September 2024 – PAYE and NIC deductions due for month ended 5 September 2024. (If you pay your tax electronically the due date is 22 September 2024)

19 September 2024 – Filing deadline for the CIS300 monthly return for the month ended 5 September 2024.

19 September 2024 – CIS tax deducted for the month ended 5 September 2024 is payable by today.

Where a taxpayer owns a business as a sole trader or in partnership, a capital gain will be deemed to arise if the business is converted into a company by reference to the market value of the business assets including goodwill. This could give rise to a chargeable gain based on the difference between the market value of the assets and their original cost.

However, in most cases the incorporation of the business will be done in such a way as to satisfy the conditions necessary to secure incorporation relief. One condition is that the entire business with the whole of its assets (or the whole of its assets other than cash) must be transferred as a going concern wholly or partly in exchange for shares in the new company.

It is important to note that where the necessary conditions are met, incorporation relief is given automatically and there is no need to make a claim. The relief works by reducing the base cost of the new assets by a proportion of the gain arising from the disposal of the old assets.

Although the relief is automatic it is possible to make an election in writing for incorporation relief not to apply. An election must be made before the second anniversary of 31 January next following the tax year in which the transfer took place e.g., an election in respect of a transfer made in the current 2024-25 tax year must be made by 31 January 2028. The election deadline is reduced by one year if the shares are disposed of in the year following that in which the business was incorporated.