HMRC have rejected the proposal that a 'brightline test' could be introduced when the Furnished Holiday Letting (FHL) regime is abolished in April 2025. The idea was that a simple test could set criteria to assist taxpayers in establishing the boundary between property letting and trading, a topic that has foxed both taxpayers and tax tribunals for decades.
Background
The Furnished Holiday Letting (FHL) rules were introduced in the early 1980s. Part of their rationale was to provide certainty as to when a holiday letting business amounted to a trade, by statutorily deeming such businesses to be a trade for various tax purposes where defined letting conditions are met.
- In 2022, the Office of Tax Simplification (OTS) Published a report which concluded that the FHL regime added a layer of complexity to the UK tax landscape, suggesting that it could be considered for abolition.
- In the event that the FHL rules were abolished, the OTS recommended the introduction of a statutory ‘brightline’ test to define when property letting activities subject to Income Tax would qualify as a trade.
Budget 2024
It was subsequently announced at the 2024 Spring Budget that the FHL regime would be abolished from 6 April 2025.
- This will bring the taxation of FHL businesses into line with ordinary letting businesses, by removing the Income Tax and Capital Gains Tax (CGT) advantages currently associated with qualifying FHLs.
Brightline test rejection
In March 2024, the Institute of Chartered Accountants in England and Wales (ICAEW) wrote to HMRC, suggesting that the introduction of a brightline test, as proposed by the OTS, should be considered as part of the abolition of the FHL rules.
HMRC have since replied to the ICAEW, confirming that such a test will not be introduced, stating that “whether an activity constitutes Trading or property letting will continue to be determined on the facts”.
HMRC cite concerns that such a test could:
- Create potential preferential tax treatment for those able to afford to buy more properties, as opposed to considering whether the overall nature of the activity constitutes trading or property letting on its merits.
- Result in more activities being considered trades.
HMRC states that the details of how the transition from being a qualifying FHL will operate in 2025 will be set out in draft legislation and accompanying documentation, which will be published soon.
Useful guides on this topic
Furnished Holiday Letting
What is Furnished Holiday Letting? How do you qualify for Furnished Holiday Letting? What are the rules for Furnished Holiday Letting?
OTS review of residential property income
The Office of Tax Simplification (OTS) has published its report ‘Property income review: simplifying income tax for residential landlords’. This explores the common complexities, issues, and concerns facing individual taxpayers with property businesses.
Spring Budget 2024: Land & Property
The Chancellor has made some major changes to several land and property taxes, announcing a reduction in the rate of Capital Gains Tax on gains on the disposal of residential property, together with the abolition of both the Furnished Holidays Letting regime and Multiple Dwellings Relief for Stamp Duty Land Tax.
Is it a trade, a business, or an investment activity?
Starting in business or running one? Is your new or existing business a trade, a business or an investment activity? The distinction is very important for tax purposes. This guide runs through key issues for tax purposes.
External link
ICAEW: HMRC rejects ‘brightline’ test for furnished holiday lets (FHLs)
