Abolition of the furnished holiday lets tax regime

In the spring budget 2024, the then chancellor announced that the Conservative government intended to abolish the furnished holidays lettings (FHL) tax regime from 6 April 2025. This will mean that short-term holiday lets and long-term lets in the private rented sector would be treated the same for income tax, corporation tax and capital gains tax (CGT) purposes. The abolition does not change inheritance tax, council tax/business rates or the VAT position.

Draft legislation to abolish the FHL tax regime was published for consultation, and we have submitted our comments. These provisions will be included in the Finance Bill introduced to Parliament after the budget on 30 October.

We are working with others in the industry, notably the Professional Association of Self Caterers UK (PASC) and the Tourism Alliance, on this and although we have objected to the abolition in principle, we recognise that with its cross-party support, we are unlikely to change the government’s direction on this issue. This also reflects the fact that the government believes this will be a tax-raising measure at a time when there is the need to recover the public purse. Therefore, our focus going forward is to influence carve-outs and mitigate the impact of abolition.

In a policy paper that accompanied the draft legislation, the government sought to set out their impact assessment of the abolition and concluded that this is minimal. However, this oversimplifies the complexities of the rural tourism industry and its business models. We disagree with the assessment and believe that the abolition of the FHL tax regime will disproportionately affect diversified rural businesses, particularly those involved in tourism.

We have pointed out that this decision has been made at a time when visitor numbers have yet to recover to 2019 levels, and that it will be impacting the wider industry and overall tourism spend. There is statistical evidence that in order to grow the industry, either visitor numbers need to recover, or people need to stay for longer and/or spend more, but in order to encourage these things to happen, businesses need to invest. The abolition of the FHL tax regime will hit profits, and in turn limit operators’ ability to invest in marketing, maintenance, upgrades, and possibly new properties, all of which will support the government’s growth agenda. Proceeding with abolition, on the other hand, may deter investment in properties that cater to tourists, ultimately impacting jobs, local suppliers, and the overall vitality of rural and coastal regions.

We have therefore recommended that the government should delay the abolition and not legislate to remove the FHL tax regime until a full impact assessment is carried out.

For over 20 years, the government has encouraged farmers and rural business owners to diversify their operations to ensure the sustainability of their agricultural businesses. Many will have converted redundant farm buildings into holiday lets, providing a valuable supplement to their agricultural income. These investments are often substantial and financed through bank loans. The FHL tax regime has played a crucial role in this by supporting investment in new tourism ventures, allowing business owners to claim capital allowances and fully deduct their finance costs. The abolition will mean that businesses are restricted in the amount of interest that can be set off against their turnover when calculating their taxable profits, which would have a detrimental effect on these businesses.

To limit the impact of this change we have recommended a phased implementation over several years, allowing businesses to adjust gradually. This would mirror the phasing-in that occurred when these finance restrictions were first introduced for the residential private rented sector.

One factor that has not been taken into account by the government is that in rural areas, holiday let accommodation includes properties that cannot be used for anything else. This may be because there are planning restrictions that only permit use as holiday accommodation or they are not suitable for standard residential letting, due to their size, location and design. Removal of the FHL regime penalises these properties, so we have suggested that the rules are retained for them.

For many furnished holiday let businesses, there are very few distinctions between the services which they provide and those of a B&B or a hotel. Services such as nightly or at least weekly cleaning including bed and bath linen are commonplace, as are services to provide food whether stocking fridges, or sending in full caterers if guests request it. In most cases, the only difference is that FHLs are single occupancy and do not have staff on site. We also believe that the government’s assessment that there are no ‘equality impacts’ of removing the regime is flawed. Anecdotally, we know from members that often it is the wife or the daughter of the farmer who runs the holiday let. Therefore, removing the FHL regime and not classing these businesses as trading is undermining work which may primarily be performed by women.

FHL income is regarded as pensionable earnings under the current rules, making it a crucial component of many business owners' retirement planning. For those in agriculture, where income can be unpredictable, the steady revenue from FHLs has provided a reliable source of income that enables them to contribute toward their pensions. Removing this benefit could have severe consequences for their long-term financial security, leaving them vulnerable during retirement, especially in light of the fluctuating nature of farming income.

Moreover, the majority of FHL operators are women as mentioned above, many of whom have not been able to make sufficient pension provisions. The removal of the FHL tax regime would disproportionately impact these women, undermining their retirement plans. This outcome appears to contradict the government’s impact statement, which claims that the removal would not affect protected characteristics, raising significant concerns about the policy's implications for gender equity. To counter this impact, we have recommended that the profits from FHLs continue to be treated as pensionable earnings to support retirement planning, particularly for women.