Since 1984, the furnished holiday lettings (FHL) rules have enabled property owners to benefit from the tax rules on trading income. This has allowed taxpayers to claim capital allowances on furniture and equipment additions, take advantage of a reduced capital gains tax rate of 10% where business asset disposal relief (BADR) is available, and claim business asset rollover relief or holdover relief. Profits from an FHL business can also currently be treated as income for pension purposes and are not affected by the restriction on finance costs for property income, nor the special rules for jointly held property.

Although there have been several tax advantages to FHL status, HMRC manual IHTM25278 makes clear that FHL properties don’t qualify for business property relief unless there is a sufficient level of additional services provided. Schedule 9 VATA 1994 also includes FHL properties in the scope of VAT.

Changes in the 2024 Budget

In the spring Budget, Chancellor Jeremy Hunt announced the abolition of the FHL rules for residential property. He highlighted that while the rules have made short-term lets more attractive, they have also reduced the properties available for long-term rental by people in local communities.

The Chancellor appears to have taken the recommendations from the November 2022 Office of Tax Simplification report into account. The report considered the need for reform to the FHL rules, not just to properties in the UK but also in the European Economic Area.

The government announced that the abolition will take effect from April 2025, and we look forward to reviewing the draft legislation when it’s published. We do however note that there will be an anti-forestalling rule introduced to avoid taxpayers rushing through a transaction in an attempt to take advantage of the capital gains tax advantages for FHL properties before the new rules take effect. This will apply from the day the Budget was announced, which is somewhat different to the April 2025 date for the other changes.

Impact of new rules

Although taxpayers will no longer qualify for a 10% capital gains tax rate (if BADR is available), the Chancellor did announce a reduction in the higher rate of capital gains tax on residential property from 28% to 24% from 6 April 2024. (There was no change to the 18% capital gains tax rate for gains on residential property payable at the UK basic rate). The jump in capital gains tax rates will therefore not be as significant as it may have been.

But the anti-forestalling rule could have an impact on transactions which were in progress, but not concluded, on Budget day. The inability to claim BADR will be an extra blow to taxpayers who may have sought to rely on rollover relief (where the proceeds from the sale of an FHL property or other qualifying asset have been reinvested in another qualifying asset) or holdover relief (where an FHL property has been gifted or sold for less than market value).

The announcements so far appear to relate to the income tax and capital gains tax changes, so we are unaware of any proposed changes to the treatment of FHL properties for business property relief for inheritance tax and VAT.

However, we seek clarity from the government as to whether there will be any balancing adjustments for capital allowances claimed in respect of FHL properties and the treatment of losses prior to the abolition of the FHL rules.

The spring Budget made no reference to the fact that FHL treatment is also available to companies. We’re waiting for details of how Section 65 CTA 2010 will be affected in respect of its reference to FHL income being treated as a trade. This could have a knock-on impact on the capital gains tax relief available on the disposal of shares in companies that have carried on an FHL business.

Read our response to the other Budget announcements

Susan Cattell, Head of Tax Technical Policy, outlines important proposals for changes to HMRC powers and taxpayer safeguards

HMRC has published a call for evidence on enquiry and assessment powers, penalties and safeguards, including proposals to align powers and safeguards across direct and indirect taxes. This is the latest stage in the implementation of the government’s 10-year strategy (published in 2020) to build a trusted, modern tax administration system.

HMRC’s enquiry and assessment powers

The call for evidence explains that HMRC relies on taxpayers notifying liability and supplying information to make the tax system work. HMRC has a range of powers enabling it to check the accuracy of information provided and to tackle non-compliance. These powers currently vary across different tax regimes, for example, the approach for direct taxes is different to the approach for indirect taxes.

One of the most significant proposals is to replace HMRC’s current enquiry and assessment powers with a single set of powers that apply across all taxes. Alternatively, circumstances or taxes where a common approach could be applied would be identified, so that appropriate powers could be designed.

Penalties

The call for evidence outlines challenges arising from the current penalty regimes, including proportionality, complexity, establishing behaviour and agents contributing to non-compliance.

Ten proposals for reform are put forward, aiming to consolidate and simplify penalties, making them easier to understand and implement while strengthening incentives to comply. One of the suggestions includes penalty escalation for continued and repeated non-compliance. Another proposes regular uprating of penalty amounts to help maintain their value in real terms.

Safeguards

The last part of the call for evidence considers safeguards. It highlights the importance of the right to appeal as a strong safeguard – responses to earlier consultations indicated that more could be done to preserve that right and to build on it. However, HMRC notes that aspects of the current safeguards create challenges for itself, taxpayers and agents.

The final six proposals for reform include potentially aligning how appeals are made (and payment requirements) across direct and indirect taxes. HMRC also wants to explore the creation of a system that encourages take-up of alternative dispute resolution and statutory reviews, which might include an opt-out approach, or mandating statutory reviews in certain cases. However, to prevent taxpayers exploiting safeguards to prolong disputes and defer payment, HMRC would also like to withdraw the option of statutory review in some cases.

Read the article in full

Payrolling BIKs from April 2026

Justine Riccomini, Head of Tax (Employment and Devolved Taxes) at ICAS, explains what employers will have to consider to enable them to payroll all benefits in kind from April 2026. Read her article in full