FHL Tax Rules – further update December 2025

Abolition of  FHL tax rules – further information

On 29 July 2024, the government published a draft legislation for consultation, which provides for the abolition of FHL tax rules from April 2025

HMRC has now published further guidance to address some of the remaining questions.

VAT

The guidance confirms that holiday accommodation, whether previously qualifying as an FHL or not, remains standard-rated for VAT.

Capital allowances and s198 elections

Transitional rules will apply to the abolition of the FHL regime so that capital allowances can still be claimed on expenditures included in a capital allowances pool by 1 April 2025 for corporation tax and 5 April 2025 for income tax.

HMRC has been asked to explain how the transitional rules will apply where an election is made under s198, CAA 2001, to fix the amount allocated to fixtures on the sale of a property. They have confirmed that the expenditure allocated to fixtures will not qualify for capital allowances in the hands of the purchaser if s35, CAA 2001 applies (ie, the fixtures are for use in a dwelling).

FHLs commencing in 2024/25

On commencement, FHL status is determined by reference to the 12 months from when the property is first let as furnished holiday accommodation rather than the 12 months from the start of the tax year/accounting period.

HMRC has confirmed that where a business commences in 2024/25, the relevant period for the purposes of the occupancy conditions begins on the first day in the tax year (or accounting period) in which letting commences and may extend past April 2025.

Business cessations

There has been some concern that there was a lack of clarity around business cessations and the rules for capital gains tax (CGT) relief.

HMRC has clarified that:

• Business asset disposal relief will continue to be available for three years when an FHL business ceases in 2024/25 on taking in a long-term tenant, and the abolition of the FHL rules will itself be treated as a business cessation.
• HMRC has confirmed that “where legislation refers to the cessation of business, it means an actual cessation of business activity”. HMRC says that the date of cessation is “the date from which there are no longer any bookings or lettings nor any intention to resume such activity in future” and that to benefit from CGT reliefs beyond April 2025, the business had to cease before then.

The guidance also confirms that HMRC does not consider that the repeal of the FHL tax rules means that an FHL business has ceased.

Jointly owned property

The FHL rules tax married couples and couples in a civil partnership who own property jointly on their share of the income from the property. However, once the FHL rules have been abolished, couples will be taxed 50:50 unless they have a Form 17 in place. Form 17 can be used where the property is held in unequal shares.

This must be done in advance of the tax year to be effective for 2025/26 so if this affects you please get in touch.

CGT and anti-forestalling

Clause 14 of the draft legislation includes an anti-forestalling rule, which is intended to prevent a CGT advantage through the use of unconditional contracts. HMRC’s guidance explains that where a contract is made on or after 6 March 2024, and the disposal takes place on or after 6 April 2025, CGT relief will not apply unless the claim includes a statement confirming that the conditions in the draft legislation are met.

In simple terms, the draft legislation requires that either:

• the purpose of entering into the contract was other than to avoid the changes made in connection with the abolition of the FHL regime or
• the contract was entered into by unconnected parties wholly for commercial reasons.

Get help with FHL tax rules

If you would like help with FHL tax rules and the changes, get in touch.

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