Finally, FHLs are treated as business property for capital gains tax purposes. This has a number of benefits, not least of which is the headline rate of capital gains tax that applies.
This is because residential property comes with an 8 per cent surcharge compared to non-residential property, meaning a basic rate taxpayer will pay tax at 18 per cent rather than 10 per cent on any profits on disposal, and a higher or additional rate taxpayer will pay 28 per cent rather than 20 per cent.
There are also a number of important reliefs available to owners of business property, such as the ability to rollover the gain from one business asset into another, or gift the asset and defer any tax charge until the asset is finally sold.
It should also be noted that business asset disposal relief may be available on FHL disposals, bringing the rate down to 10 per cent irrespective of tax bracket, increasing that tax saving to 18 per cent for higher and additional rate taxpayers up to their first £1mn of qualifying lifetime gains.
What the change means
From April 6 next year, all of this disappears, and FHLs will be treated the same as any other residential property letting business.
On the plus side this will lead to an element of simplification. There will be no need to refer to the furnished status or occupancy conditions for tax purposes, and the records can be pooled with any other letting activities as part of one rental business.
Unfortunately, that is probably where the good news ends, and even that positive slant might be somewhat tempered by the looming approach of Making Tax Digital in 2026, requiring taxpayers to submit quarterly electronic records to HMRC.
One of the highest priorities to consider for those already running FHL businesses will be continued viability. Some taxpayers will suddenly find that they are only now receiving a fraction of the tax relief on their loan interest that they were before, and their capital allowances cease as well.
If the business was barely getting by before, this additional tax burden could make the operation more trouble than it is worth, or not viable at all given the ongoing requirement to introduce capital without the tax relief.
This is where strong collaboration between financial advisers and accountants will be key in accurately determining the tax position of these businesses and translating this into realistic cash flows so clients can plan accordingly.
