In light of the recent correspondence from the Institute of Chartered Accountants in England and Wales (ICAEW) regarding the abolishment of the Furnished Holiday Lettings (FHL) regime, HM Revenue and Customs (HMRC) has clarified its stance. According to HMRC, the determination of whether an activity falls under property letting or trading will be based on factual analysis and established case law principles.
Furnished Holiday Lettings in the Spring Budget
During the Spring Budget of 2024, the Government announced its decision to discontinue the special tax regime for FHLs effective April 2025. Prior to the introduction of the Furnished Holiday Lettings rules, there existed ambiguity surrounding the classification of short-term holiday rental businesses as either property letting or trading activities. This ambiguity led to uncertainty among taxpayers, resulting in several legal cases on the matter.
In response to ICAEW’s request for the implementation of a ‘brightline’ test, proposed by the Office of Tax Simplification in 2022, HMRC has opted against such a measure. HMRC expressed concerns over potential drawbacks associated with the test, including the likelihood of expanding the scope of activities classified as trading. Instead, HMRC emphasised the importance of determining the nature of activities based on factual evidence, supplemented by court guidance.
Regarding the potential impact on inheritance tax (IHT) and the eligibility for business property relief (BPR), HMRC maintains its position that Furnished Holiday Lettings generally do not qualify for BPR, as stated in IHTM25278. However, HMRC assured that the abolition of the Furnished Holiday Lettings regime is not expected to alter the application of BPR.
ICAEW raised concerns about the applicability of transitional provisions concerning capital allowances and losses for its members. In response, HMRC assured that details regarding transitional provisions will be outlined in forthcoming draft legislation and accompanying documentation.
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