Time to plan for threat to holiday let tax regime

Furnished holiday lets (FHLs) are an integral part of many farm tourism ventures and enjoy favourable tax treatment, provided they meet certain requirements including their availability and actual occupation by paying customers.

The benefits include possible capital gains tax (CGT) and inheritance tax (IHT) reliefs, as well as capital allowances, pension contribution advantages, and the ability to offset finance costs against business income.

See also: Tax tips for farm holiday accommodation management

The government rationale for doing away with these is that FHLs restrict the availability of rental and open market accommodation to local people.

While an announcement was made in this spring’s Budget that the regime is to be abolished with effect from April 2025, the measure does not appear in the resulting Finance Bill.

Instead, there may be a consultation, secondary legislation or the change could be introduced in a subsequent Finance Bill.

This begs the question of timing, including whether the government can legislate this before the general election and if not, whether the move will survive the election result. It is also possible that the plans could be watered down.

However, the potential loss of FHL status should prompt some serious thinking and planning, says Julie Butler, of accountant Butler & Co. 

The options include:

• Continue with holiday lets, despite the risk that the current tax advantages will be removed – this will be the choice for some second home owners but is an unlikely one for farm businesses committed to a commercial enterprise.
• Let the accommodation on a “normal” residential tenancy arrangement – in some cases this will involve a change in the planning status of property where the current permissions are for holiday accommodation only – potentially a lengthy process. A realistic budget should be drawn up comparing earnings and profit/losses for both holiday and residential lets, the latter generally being far less demanding than the former.
• Sell the holiday lets and distribute the cash to children/other family members. However, aside from the tax considerations, selling a residential unit in or close to the farmyard is generally not favoured, because of the loss of control as to who occupies the property.
• Pass the cottages to children/other family members tax-free, with holdover relief from CGT.
• Sell the holiday cottages and roll over the cash CGT-free within three years into trading assets, for example other tourism assets such as glamping sites or farm assets that achieve good tax reliefs, like grain stores, livestock housing, or a new dairy. The rollover can be into any trading asset – it does not have to be farming or tourism related.
• Sell the holiday accommodation property and claim Business Assets Disposal Relief (BADR), which brings the CGT rate down to 10%. This is an option only where the whole or part of a business is being disposed of and ceases.

The considerations for each FHL business situation will be different depending on the circumstances and the drivers of the owners, says Julie, who advises that this process can also form part of a full succession planning review, while keeping an eye on any legislative changes.

Lobbying

There has been considerable opposition to the government’s plan to abolish the FHL tax regime, including by organisations representing the general self-catering holiday accommodation sector, as well as specialist operators and bodies such as the Country Land and Business Association.

Julie points out that diversified farm tourism ventures often involve more than simply the accommodation. Services such as farm tours, catering, bike loan or hire, trekking or riding and other activities make the whole offering a package.

“It is difficult to separate one element (the FHL) and say that although the cottage is part of a vibrant farm holiday attraction, it’s not a business asset but the rest are,” she says.

“Also, if it’s not a business, then it’s a contradiction to charge 20% VAT on the holiday accommodation.”

The provision of holiday accommodation is charged at the VAT standard rate of 20%, subject to the VAT threshold which was raised to £90,000 a year in this year’s budget.

If the proposed FHL tax changes are carried out, this will make it complicated for full holiday and tourism businesses to decide what is the best commercial business structure, especially as promised guidance has not yet been issued.

Inheritance tax

“Ironically, if the choice is made to move from providing holiday accommodation to simply letting out property on the general residential accommodation market, this could lead to more chance of achieving business property relief from IHT as part of the whole.”

Capital gains

If the government’s FHL plans come to fruition, from 6 April 2025 the sale of farm holiday accommodation will be taxed at the standard residential property CGT rate of 18% for basic rate taxpayers and 24% for those on higher rate tax.

Until then, they enjoy BADR, giving a 10% CGT rate for qualifying assets.

The 24% rate is a reduction from 28% and, along with the FHL move, designed to encourage more sales of residential property onto the market, including second homes.

Losses and capital allowances questions

Guidance is also awaited on how losses carried forward would be treated, along with capital allowances and written down values when the FHL cut off will occur part way through that writing down process.

Incorporation

Moving properties into a limited company structure is an option for some FHL property owners, says Julie, as this would allow full interest relief against earnings.

However, incorporation needs to be carefully thought through, as it may also give rise to CGT and Stamp Duty Land Tax charges.

Detail awaited

Guidance is also awaited on what is known as an anti-forestalling rule to prevent abuse of the current CGT reliefs, for example by agreeing sales through unconditional contracts in the run up to the proposed abolition of the FHL regime but which fail to complete before 6 April 2025