Holiday let tax rules allow owners to escape thousands of pounds in tax
The tax treatment of furnished holiday properties appears inappropriately generous and could encourage owners to lock away much needed housing stock to save thousands of pounds in income and capital gains taxes. The regime, dating back to the 1980s is in desperate need of review and reform in light of the recent platforms such as Airbnb making these investments much easier to manage passively.
Our research into this area shows how investors in holiday lets get the best of both worlds, with their earnings being treated as quasi businesses for income tax, but escaping national insurance contributions altogether, and also a lighter capital gains tax rate equivalent to a business that is taking on much more risk. Worked examples demonstrate that the tax savings are very considerable and represent a real incentive for tax driven behaviour beyond what was intended at the time when the rules were first designed.
We also explore an interpretation of the rules being promoted to the owners of second homes to convert these to holiday lets. This suggests owners can significantly reduce capital gains tax on any price escalation during the whole time of ownership including when the property was a private holiday home. HMRC debunked this interpretation when TaxWatch first highlighted the issue recently, but are now reviewing the technicalities. There is clearly current ambiguity which needs to be resolved. We call on HMRC and the Treasury to restrict the capital gains tax benefits to only the period where the Furnished Holiday Let (FHL) regime applies.
The full report can be found here.
The research shows, in just one corner of the tax system, how the complex rules, developed organically over many decades, incentivise and facilitate UK tax compliance and avoidance problems. The savings these rules permit are separate to the work of the Treasury Select Committee’s recent report on tax reliefs, which TaxWatch contributed to .
We also call on the Treasury to respond to the recommendations from the now abolished Office for Tax Simplification particularly in regard to personal use of properties within the FHL regime.
Post publication update
We have had a further response from HMRC confirming that BADR is available on the total capital gain on disposal of an FHL property, if it satisfies the BADR qualifying requirements on cessation of the business. This applies even in circumstances where the property has not been used as an FHL for the whole period of ownership. This further reinforces TaxWatch’s recommendation that this loophole in the legislation should be closed, as there can be no policy rationale for this beneficial treatment for property owners. We have submitted an FOI to HMRC with the aim of identifying the ongoing costs of this loophole.