OTS Property income review: how it impacts Furnished Holiday Let businesses

The Office of Tax Simplification (OTS) Property income review published in November 2022 focused on simplifying income tax for residential landlords. If some of the recommendations are taken on board, there is the possibility of a comprehensive reform to the existing Furnished Holiday Let (FHL) regime.

Presently, FHL businesses can obtain the following benefits compared to traditional property rental businesses:

• Capital allowances (or a deduction if the cash basis is being used) are given for fixtures, furnishings, white goods and so on within the property.
• Interest incurred on borrowings is fully deductible in calculating the taxable profits rather than by giving a tax reduction at basic rate in the way that applies for other rental property.
• Income from the letting can be treated as relevant earnings for the purpose of calculating what level of pension contributions can be made.
• The possibility of qualifying for Business Asset Disposal Relief on a sale reducing the tax rate to 10% compared to up to 28% for buy to let properties
• Income from FHL held jointly or by married couples/civil partnerships can be split in any proportion as they couple decides compared to mandatory 50:50 split for buy to let property income unless form 17 is in place.
• Business Asset Disposal Relief, which means that a gain on the sale of a property qualifying as a furnished holiday let (FHL) can be taxed at 10% rather than 18-28%.
• Business Asset Rollover Relief, which means that a gain made on the sale of an FHL property can be deferred if the proceeds are reinvested in a suitable asset.
• Gift Hold-Over Relief, which means a gain made on gifting an FHL property can be held over although only for the period the property qualified as an FHL.

However, the OTS believe the taxation of property income is over complicated by distinguishing between standard rentals and short term holiday rentals. Different income tax treatment applies to each as noted above as well as differing treatments for Capital Gains Tax (CGT) and Inheritance Tax (IHT).

The OTS have suggested there is no need to have different tax regimes and all property income should be treated in the same manner, acknowledging that there may be a requirement to determine if a property business is of such a scale as to be treated as a trading business (bright line test). A significant number of property owners believe they are carrying on a business, not understanding the implications of property income for tax purposes.

The OTS also suggest that the taxable income should be split in the same proportion as beneficial ownership in all cases. This would prevent the mandating of a 50:50 split between spouses and the need for complicated form 17 for buy to let landlords.

Another area of confusion is the tax treatment of repairs and improvements to property. The question of whether it is an allowable deduction for income tax or a capital expense which will reduce CGT payable on a future disposal is a longstanding dilemma for many taxpayers. The OTS suggest only further guidance and examples from HMRC can help.

OTS recommends that if the FHL regime is retained then the current qualifying tests be reviewed (105 days actually let and 210 days availability). They recommend restricting the regime to properties used for commercial letting by removing the potential for personal occupation or imposing a maximum number of private use days.

Finally, the report mentions the difficulties landlords will have in complying with Making Tax Digital (MTD) when introduced in April 2024 and hopes HMRC (and software providers) will have sufficient resources to manage this, particularly for jointly owned property.

To discuss your circumstances, please get in touch with our furnished holiday let specialists by calling one of our offices or emailing leisure@eqaccountants.co.uk.