Furnished holiday lets and capital gains tax – key considerations for your rural business

As it stands, a furnished holiday let (FHL) business is deemed to be a trade for the purposes of capital gains tax (CGT), but this is scheduled to change.

In March 2024, it was announced in the Spring Budget that the FHL tax regime is to be abolished from 6 April 2025. This abolition is going ahead as the Labour Government has published the draft legislation for inclusion in the Finance Bill after the Autumn Budget on 30 October.

One of the impacts of the abolition of the FHL regime is that an FHL business will no longer be deemed to be a trade for CGT purposes. This means that the CGT reliefs will not be available when a FHL property is disposed of (sold or gifted), or after the commencement date of 6 April 2025.

When the abolition was first announced it was made clear that there would be anti-forestalling rules to prevent taxpayers manipulating a disposal in order to continue benefitting from CGT reliefs after April 2025. The standard CGT rules state that the date of disposal is when contracts are exchanged, not the date the sale completes. As an example, if you had exchanged contracts to sell ‘Buttercup cottage’ to ‘Joe Blogs’ on 29 March 2024 but completed four weeks later on 26 April, this disposal would have taken place in the tax year 2023-24, not the current tax year 2024-25.

The anti-forestalling rule in the draft legislation aims to prevent a taxpayer obtaining a tax advantage (by being able to claim and benefit from CGT reliefs after abolition of the FHL regime) through the use of unconditional contracts entered into during the ‘pre-commencement period’. This period is from 6 March 2024 (i.e. the date of the Spring Budget) to 5 April 2025.

This rule applies where you exchange contracts to dispose of the FHL property during the commencement period but the property is transferred (gift) or completes (sale) after 6 April 2025. In these circumstances, you will not be able to claim CGT reliefs unless one of two exceptions apply and you will need to make a statement that the purpose of the contract was not to avoid the changes to the CGT rules when you claim the reliefs. The exceptions are that:

(1) the contract was entered into wholly for commercial reasons, or

(2) the parties to the contract are not connected persons.

Connected persons is defined broadly for CGT purposes and includes your spouse/civil partner; a relative of you or your spouse/civil partner and the spouse/civil partner of a relative. Relative means a brother, sister, ancestor or lineal descendant (such as son or daughter, or grandchild) but does not cover all family relationships. In particular, it does not include nephews, nieces, uncles and aunts.

The anti-forestalling provisions have not been drafted in a way that prevents members from claiming CGT reliefs on the sale of their FHL business or on a transfer of their FHL properties as part of their prearranged succession plans in the current tax year. They only affect those transactions where the sale or the gift completes after 6 April 2025, even if the contract was entered into in this tax year.

So, in summary, if you want to sell up and claim business asset disposal relief, or if you want to pass the properties on to the next generation and jointly claim gifts holdover relief, there is a window of opportunity to do so. If you do not have professional advisers that help you with this, please speak to your regional CLA team who can recommend property lawyers that can assist.