Impact of scrapping the furnished holiday let tax relief

Amongst the various predictions for what Jeremy Hunt will announce in his Budget on 6 March, changes to the tax regime applicable to furnished holiday lets (FHLs) is a late entry. If enacted, changes are predicted to raise £300m in tax revenues.

In addition to the additional tax revenue raised, the chancellor will also be envisioning that changes to the FHL regime would lead to landlords selling their properties, or reverting back to more traditional long-term lettings, providing a boost for the housing market and overall supply in tourist destinations. 

The existing FHL regime

In order to qualify as a FHL, the property must generally be made available as furnished holiday rental accommodation for at least 210 days per annum and actually be let for at least 105. In turn, the tax regime applicable to qualifying FHLs is advantageous compared to that which applies to more usual buy to let investment properties and includes: 

• Full tax relief for mortgage interest.
• Access to certain capital gains tax reliefs, including business asset disposal relief (BADR) on the sale of the property.
• Entitlement to claim capital allowances on the furniture and white goods within the property.
• FHL profits being relevant earnings for pension purposes.

Impact of potential changes

The precise details of any announcements to come remain unknown, but the headline change would almost certainly be bringing the deductibility of mortgage interest rules applicable to FHLs in line with those applicable to buy to let residential properties owned by individuals. 

These changes have had a significant impact on the buy to let market over recent years and have resulted in droves of landlords exiting the market as their post-tax investment returns plunged. 

Many landlords have opted to incorporate their buy to let property portfolios into a limited company wrapper, which are outside of the interest deductibility restrictions. Whilst a similar solution may be available for FHL landlords, incorporation can be a complex and costly process. Ignoring the potential tax implications, a significant issue is that mortgaged properties generally cannot be transferred to a company without express permission of the lender or will require a remortgage in the company name, potentially at a higher interest rate. Transferring the property out of the borrower’s direct legal ownership will almost certainly be against the terms of the mortgage and doing so without informing the lender could be tantamount to mortgage fraud.  

In addition to changes to the deductibility of interest, removing the availability of BADR, which can apply at 10% rate of capital gains tax when a FHL is sold, may also be on Mr Hunt’s radar. Residential property-related capital gains outside of this relief are taxed at up to 28%. With many FHLs representing taxpayers’ retirement pots, increases to applicable capital gains tax rate may create some difficult choices for owners in the future. 

If amendments to the FHL tax regime are announced, the c127,000 individual-owned FHL businesses in the UK will need to assess the commercial impact on their investments and decide if an alternative approach is required.