As part of the 2024 Spring Budget, the UK Government has announced that they are abolishing the Furnished Holiday Lettings (FHL) tax regime from 6 April 2025, meaning short-term and long-term lets will be treated the same for tax purposes.
Individuals with FHL and non-FHL properties will no longer need to calculate and report income separately. The UK Government claim this will “level the playing field between short-term and long-term lets and support people to live in their local area.”
As background, in August 2022, the ASSC and the Professional Association of Self-Caterers (PASC) welcomed the opportunity to provide evidence to the UK Government’s Call for Evidence on Property Income Tax by the Office of Tax Simplification. We highlighted the benefits of having a different regime for taxing property income and capital gains for FHLs. FHLs are deemed trading businesses for income and tax purposes. As such they are subject to a more liberal tax regime than that of Buy to Let property businesses (BTLs).
FHL tax regime requirements
The FHL treatment applies to self-catering accommodation let on a commercial basis and meeting a minimum level of letting. This could be in the form of a house, cottage, flat, suite of rooms, caravan, or even a yurt, so long as it meets the specific conditions.
The original legislation, introduced in the early 1980s, required:
These rules tightened in 2011/12, increasing the requirements to:
The FHL tax rules are unlikely to apply to second homes as they are typically unable to meet the requirements following the 2011 reforms. Additionally, an occupier of the let cannot stay for more than 155 days of a 12-month period (roughly five months). It does not count any days let to friends or family at reduced rates or lets of more than 31 days as these are not commercial.
Major tax benefits include:
Minor tax benefits include:
Capital allowances
Capital allowances can be claimed on FHLs. This is very important for investment in the sector. Normal letting rules prohibit claiming tax relief on initial capital expenditure. The normal letting rules encourage unfurnished letting of properties, which is the most common approach in the UK. That is not appropriate for FHLs. Furthermore, in the absence of capital allowances, there would be no basis for tax relief on swimming pools, children’s play areas, etc.
UK Government Changes As part of the 2024 Budget, the UK Government stated the following:
“The government will remove the current incentive for landlords to offer short-term holiday lets rather than longer-term homes by abolishing the Furnished Holiday Lettings (FHL) tax regime. This will level the playing field between short-term and long-term lets and support people to live in their local area. This will take effect from April 2025 and draft legislation will be published in due course.”
The ASSC is disappointed with the changes announced by the UK Chancellor as we believe that FHLs should continue to enjoy the same tax treatment as any other business. The ASSC and its industry partners consider that the impact of this policy reversal will result in fewer entering self-catering, with FHL properties being sold and probably ending up as second homes, exacerbating housing challenges in communities while providing minimal contribution to the economy.
The proposed abolition of the Furnished Holiday Let regime risks inflicting severe damage on an industry which is indispensable across the UK, and especially to rural and coastal economies. It is a direct threat to the future viability of the self-catering sector and the many SMEs and micro businesses that are part of it, including many in the Scottish Agritourism community.
In addition, we consider that ongoing investment for existing businesses will be hit, with possible loss of quality. Self-catering is a marginal profit activity, and these rules will see already small profits decline. This effect will be felt most in areas of fragile economy, negatively impacting our island, rural and remote communities.
This policy, in conjunction with short-term let licensing and planning control areas introduced by the Scottish Government represents yet another threat to the sector and may be the last straw for many.
The ASSC worked collaboratively with the UK Government in 2010 to avoid this disadvantage to the self-catering sector. It is disappointing that it has come to this.
More detail here.
Fiona Campbell, CEO of the Association of Scotland’s Self-Caterers, said:
“The abolition of the Furnished Holiday Lettings (FHL) tax regime by the UK Government is the last thing the beleaguered and hard-pressed Scottish self-catering sector needs at the present time.
“In recent years, our sector has been hit by the Scottish Government’s onerous and burdensome short-term let licensing and planning regulations so the UK Chancellor’s Budget announcement on FHL spells yet more dispiriting news for a crucial component part of the Scottish tourism industry.
“Self-catering businesses should not be seen merely as a quick revenue source by the UK Government, but instead as a vital, valued and integral part of our vibrant tourist market. The sector provides huge economic benefits for local economies and local communities and must be supported by government rather than being used as a convenient scapegoat for wider failures in housing policy.
“The ASSC maintains that the UK Government would be much better placed easing the regulatory burden on long-term tenancies as opposed to penalising the holiday let sector. Rather than scapegoating and gaslighting, policymakers need to take a proactive and holistic approach to housing challenges, not simplistic interventions which will simply hit small businesses for no material benefit.”
We are working with our fellow Trade Associations including PASC, and others to challenge the abolishment of the FHL Allowances which will affect many ASSC members. To help us in this work, please take part in this Petition, it will only take a couple of minutes: https://pascuk.eaction.online/FHL.
This vital survey will help us to assess the impact of FHL abolition and lobby accordingly. The results will help strengthen our advocacy efforts, providing valuable data to demonstrate the impact of this change across the whole of the UK: https://surveymonkey.com/r/5KMN6JY
We have written to every MSP and MP in Scotland and briefed them on this matter and continue to lobby on your behalf.
This issue was debated in UK Parliament on 1st May. Read the transcript.
We are doing our best to understand the implications. However, at this point, no legislation has been laid and we are awaiting further detail.
Expert advice
We have been wary of trying to answer or advise owners on what to do, this is financial advice and just like legal and fire this needs to come from experts. Whilst owners are understandably keen to act quickly and agency Members keen to inform, we simply do not have that information yet.
We will advise on Webinars and Papers to support you through this whilst continuing to lobby the UK Government, MPs and MSPs.
We have weekly meetings arranged with the leading experts on this matter and over the coming days and weeks, we will keep members informed of any changes, and the details of the changes and advice on how to mitigate the impacts. This will come in the form of FAQs, Guidance Sheets and Webinars, which will be free for members.
We will also support members in terms of benefiting from Capital Allowances whilst they still can.
What we know so far, the policy drivers for this change, and what the eventual outcome might be, according to the leading tax consultant in this field.
ASSC Webinar with Francis Clark to be held on 10th May at 10.30am.
FAQs
Q Will this apply to Scotland?
A The Furnished Holiday Let Tax Regime is not a devolved matter and is led by the UK Government. It will automatically apply to Scotland.
Q If FHLs are no longer deemed businesses, will they have to revert to Council Tax?
A The Council Tax (Dwellings and Part Residential Subjects) (Scotland) Amendment Regulations 2021 (legislation.gov.uk) regulations relate to the requirement that, to be classed as self-catering holiday accommodation in terms of Non-Domestic Rates, premises must be let for a period of at least 70 days in the financial year, in addition that the premises be available for letting for 140 days or more. In brief, if your property is available to let under 140 days you pay Council Tax, available over 140 days you pay business rates. This will not be amended by the abolition of FHL taxation. The Small Business Bonus Scheme will similarly not be impacted.
Further, the abolition of the FHL regime will not have any impact on your planning status.
CONTEXT:
The Furnished Holiday Let Regime
The Furnished Holiday Let regime is not a “loophole”. It was specifically designed to provide a fair tax regime for these important trading businesses. It encourages entrepreneurship, investment and it drives growth in rural and coastal areas.
The ASSC is disappointed with the changes announced by the UK Chancellor as we believe that FHLs should continue to enjoy the same tax treatment as any other business. The ASSC and its industry partners consider that the impact of this policy reversal will result in fewer entering self-catering, with FHL properties being sold and probably ending up as second homes, exacerbating housing challenges in communities while providing minimal contribution to the economy.
Many small businesses, including farmers who have been encouraged to diversify into tourism, now face being taxed on more than their net profit. In addition, we consider that ongoing investment for existing businesses will be hit, with possible loss of quality. It will dissuade property owners from investing in their properties, engaging local tradespeople and could ultimately see owners look to reduce costs by reducing staff.
Self-catering is a marginal profit activity, and these rules will see already small profits decline. This effect will be felt most in areas of fragile economy, negatively impacting our island, rural and remote communities.
This policy, in conjunction with short-term let licensing and planning control areas introduced by the Scottish Government, represents yet another threat to the sector and may be the last straw for many.
FHLs are not the cause of the housing crisis nor are they the solution to it
We understand concerns in relation to the housing market generally and the availability of affordable homes in local areas specifically. However, the traditional self-catering sector is not, and has never been, a contributor to the housing crisis:
Traditional, responsible self-catering units, or short-term lets (STLs), support communities
‘Short-term lets’ are often presented as being a leading cause of Scotland’s housing crisis. However, it is important to place the debate in a holistic context – for instance, noting the number of empty homes in Scotland, demographic changes, and the need to build more homes – while recognising the value of tourist accommodation to the Scottish economy and local communities.
Our concerns are also shared by those in the Private Rental Sector and the farming community. The National Residential Landlord Association have said “Squeezing holiday lets is not the answer”. Similarly the NFU have said “The announcement on the abolition of the Furnished Housing Letting regime is a significant concern as it’s an important source of diversification for farm businesses which underpins resilience”.
Challenges faced from further policy interventions
The abolition of the FHL regime must been seen as part of a package of regulatory interventions aimed at the self-catering sector, including a proposed statutory registration scheme and new planning use class in England and Short-Term Let Licensing and Planning Control Areas in Scotland.
Any regulations taken forward with regard to the self-catering sector, either at a national or local level, need to be informed by robust empirical data.
Our Ask
We call on MSPs and MPs to support traditional self-catering activity, to back farmers and to support the rural pubs, workers and communities that rely on our sector by urging the UK Government to not introduce any changes to the Furnished Holiday Let regime and instead wait until the Government has a full picture of the market from the statutory registration scheme in England and the Licensing regime in Scotland.
Policymakers should not use holiday accommodation as a means to solve housing challenges in Scotland, instead focusing on building more affordable homes and tackling the scourge of empty properties. Small businesses like self-catering, present in communities for decades, should not be used as a convenient scapegoat for wider failures in housing policy.
At the very least a full consultation and associated Business Impact Assessment of the proposal must be made before it advances.
The industry, as a collective union, look forward to collaborating with all governments to share our expertise, in order to develop a proportionate, justifiable solution and necessary safeguards for a sector that provides excellent value domestic holidays, with monies spent and retained in the UK.
Updated May 2024
[1] Vacant properties included those classified as: long-term (six months or more) empty (44,600, 1.7% of all dwellings) unoccupied exemptions (46,100, 1.7% of all dwellings), such as new homes yet to be occupied and dwellings undergoing repair or awaiting demolition.