In a proactive submission, the CIOT has put forward several key points around the UK government’s proposal to remove the tax rules for furnished holiday lettings from April 2025, cautioning that simply abolishing the regime will likely lead to unintended consequences:
Complexity: although removing the FHL rules would aid simplification, the FHL regime provides a bridge between the tax treatment of a small property business and that of running a trade such as a hotel. The FHL rules do therefore provide certainty of tax treatment for short-term holiday letting businesses which meet the qualifying conditions.
Trading or investment business: Simply removing the FHL regime could lead to disputes around the distinction between holiday businesses and those businesses with trading status, particularly for letting businesses with a high level of services (which may argue their activities constitute a trade in order to access the more favourable tax treatment). This, in turn, could increase litigation time and cost for HMRC.
Statutory test: The CIOT supports a previous Office of Tax Simplification proposal to introduce a ‘statutory brightline test’ to provide clarity on whether a business is trading or not, considering factors such as number of units, length of letting term, element of private use, and services provided, to determine where the boundary between trading and investment lies.
Managing the transition:Transitional protections will be required, for example on the treatment of balancing charges arising on abolition of the FHL regime and the use of losses by FHL businesses.
Protecting the Exchequer:The anti-forestalling rule which will apply from 6 March 2024 (the date of Spring Budget 2024 when the proposal for abolition was first announced) and will ‘prevent the obtaining of a tax advantage through the use of unconditional contracts to obtain capital gains relief under the current FHL rules’, causes uncertainty. For example, does this mean business asset disposal relief will not be available from that date? The CIOT urges the government to clarify the scope of the rule and publish draft legislation and guidance without delay.
In a proactive submission, the CIOT has put forward several key points around the UK government’s proposal to remove the tax rules for furnished holiday lettings from April 2025, cautioning that simply abolishing the regime will likely lead to unintended consequences:
Complexity: although removing the FHL rules would aid simplification, the FHL regime provides a bridge between the tax treatment of a small property business and that of running a trade such as a hotel. The FHL rules do therefore provide certainty of tax treatment for short-term holiday letting businesses which meet the qualifying conditions.
Trading or investment business: Simply removing the FHL regime could lead to disputes around the distinction between holiday businesses and those businesses with trading status, particularly for letting businesses with a high level of services (which may argue their activities constitute a trade in order to access the more favourable tax treatment). This, in turn, could increase litigation time and cost for HMRC.
Statutory test: The CIOT supports a previous Office of Tax Simplification proposal to introduce a ‘statutory brightline test’ to provide clarity on whether a business is trading or not, considering factors such as number of units, length of letting term, element of private use, and services provided, to determine where the boundary between trading and investment lies.
Managing the transition:Transitional protections will be required, for example on the treatment of balancing charges arising on abolition of the FHL regime and the use of losses by FHL businesses.
Protecting the Exchequer:The anti-forestalling rule which will apply from 6 March 2024 (the date of Spring Budget 2024 when the proposal for abolition was first announced) and will ‘prevent the obtaining of a tax advantage through the use of unconditional contracts to obtain capital gains relief under the current FHL rules’, causes uncertainty. For example, does this mean business asset disposal relief will not be available from that date? The CIOT urges the government to clarify the scope of the rule and publish draft legislation and guidance without delay.
