Background – the current rules for the Furnished Holiday Lettings (“FHL”) tax regime
Under the current tax rules the income from furnished holiday lettings may treated as “trading income” instead of income from a “property business”. If the income is treated as trading income this has significant advantages in terms of:
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the deductibility of finance costs;
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the use of losses;
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the ability to claim capital allowances;
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the classification of such income as eligible income for pensions contribution purposes; and
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also gives scope for claiming capital gains tax reliefs.
There are however fairly strict rules before this favourable tax treatment is available. For the accommodation to fall within the definition of “qualifying holiday accommodation”, the following conditions must be met:
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it is available for letting to members of the public for at least 210 days in the tax year;
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it is actually let to members of the public for at least 105 days;
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the period of any individual let does not (except in abnormal circumstances) exceed 31 days; and
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during the tax year, the total number of days on which the property is let for a period exceeding 31 days is not more than 155 days.
The Spring Budget 2024
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As announced in the Government Policy Paper in March 2024 Spring Budget 2024 — Overview of tax legislation and rates (OOTLAR) – GOV.UK (www.gov.uk) the FHL Regime is to be abolished:
“The government will abolish the Furnished Holiday Lettings tax regime, eliminating the tax advantage for landlords who let out short-term furnished holiday properties over those who let out residential properties to longer-term tenants. This will take effect from April 2025.”
The Institute of Chartered Accountants of England and Wales (“ICAEW”)
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The ICAEW wrote to HMRC about the abolition saying that the existing FHL legislation “provided clarity over whether operating a short-term holiday rental business should be treated as a trade for tax purposes [and so trading income and more favourably taxed rather than as income from a “property business” and so less favourably taxed].”
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In essence the ICAEW proposed that if the FHL regime was to be abolished there should nevertheless be some clear rules – what they referred to as a “brightline” test – to determine whether income counted as “trading income or “property business income”.
HMRC’s rejection of any “brightline” test
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But HMRC rejected any set of clear rules being introduced to determine between “trading income” on the one hand and “property business” income on the other hand. They said (paragraphing added):
“We agree with you that certainty and clarity are important here, but we take a different view on the best approach to achieving that.
While there is no statutory definition of ‘trade’ the courts have provided guidance on the borderline between trade and property income with a focus on the underlying source of income.
Accordingly, whether an activity constitutes trading or property letting will continue to be determined on the facts.
… a brightline test would have some downsides. For example, it could create potential preferential tax treatment for those able to afford to buy more properties, as opposed to considering whether the overall nature of the activity constitutes trading or property letting on its merits.”
Conclusion
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One cannot help feeling that the ICAEW point is well made. Without any brightline test with clear rules one can see that it may often be tricky to decide – on the basis of the facts and case law – whether income counts as “trading income” or “property business income”. As the ICAEW said in their letter to HMRC:
“… if the FHL regime [is] abolished, a statutory “brightline” test may be required to define when a property trading business is being carried on. ICAEW calls on the government and HMRC to consider whether such a test will make it simpler for taxpayers to determine whether they are operating a property business or a trade. A simple test would also help to ensure that further admin burdens are not placed on HMRC.”
But sadly, HMRC were not for budging.
Note: This material is for information purposes only and does not constitute any form of advice or recommendation by us. You should not rely upon it in making any decisions or taking or refraining from taking any action. If you would like us to advise you on any of the matters covered in this material, please contact Brendan Kelly: email brendan@mitchells-roberton.co.uk