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HMRC Rejects ICAEW’s Brightline Test for FHL

Published by Prerana
Posted Date: May 17, 2024 , Modified Date: May 21, 2024

Furnished Holiday Lettings (FHL) is a regime that allows tenants to rent their property for short-term holiday purposes to get certain tax benefits. However, the UK government is abolishing the FHL regime from April 2025.

The Institute of Chartered Accountants for England and Wales (ICAEW) suggested a brightline test. Additionally, the test will aim to differentiate between property letting and trading activities. But HMRC has rejected the need for a brightline test deeming it unnecessary.

FHL And its Abolition

FHL is a short-term holiday accommodation service that can provide certain tax benefits to landlords. For instance, if you live in London and have a furnished property in Manchester which is going unused, you can rent out that property as a short-term holiday accommodation and get income as well as tax benefits from it.

FHL Abolition

If you are eligible for the Furnished Holiday Let (FHL) relief, you can get various tax reliefs that are not applicable to normal serviced accommodations. In addition, you will be eligible for reliefs such as Business Asset Disposal Relief (BADR), Rollover Relief and more.

Due to these attractive benefits of FHL, the UK saw a lot of investments in FHL, reducing investments in long-term lettings. This led to people finding it difficult to find a home in their local community. So, the UK government has decided on the abolition of the FHL regime which is projected to raise £245 million a year.

Will There Be a Brightline Test For FHL?

In response to the abolition of the FHL regime, the Office of Tax Simplification (OTS) introduced a brightline test in 2022. The brightline test in legislation will help to differentiate between property letting and trading activities. Also, the tax faculty believes that the test will be beneficial for Inheritance Tax (IHT) in determining whether Business Property Relief (BPR) is applicable.

A brightline test is a simple type of test that differentiates how certain things will be taxed based on specific conditions. New Zealand has a bright-line test that determines how you will be taxed if you sell an investment property within five years of buying it.

According to OTS, the brightline test will be considered based on the following factors:

  • Minimum number of properties let – OTS suggests that property trading should apply only after a number of units are let, which can be five or ten properties.
  • Letting on a short-term basis – Letting and Trading can be differentiated according to an already existing definition of short-term letting.
  • No personal use of the property let – Landlord with a profit motive and an investor in property can be a distinguishing factor for property letting and trading activities.
  • Level or personal time devoted to the property letting and services provided – The minimum level of hours per week spent by the landlord can be a deciding factor for property letting and trading activities.

OTS understands the difficulty in judging whether a property is for investment purposes or personal labour. In addition, OTS believes that these factors for the brightline test can be helpful for definitions of Inheritance Tax, Capital Gains Tax, and National Insurance.

HMRC, however, has rejected the need for a brightline test for any of these purposes. So, there will not be any brightline tests after the abolition of the FHL regime.

How Will HMRC Determine FHL Status Without a Brightline Test?

HMRC believes that the brightline test is unnecessary as it has other grounds on which they can determine whether a property is taxed for letting or trading purposes. So, after FHL abolition, HMRC will determine the difference between property trading and letting activities based on specific facts of each case, guided by existing case law.

FHL abolishment

According to the HMRC, the test will have a negative impact rather than benefitting as more activities will be considered trade with the brightline test. Also, HMRC believes that the abolition of the FHL regime would not affect the application of Business Property Relief (BPR). However, the transition from the FHL regime and its rules have not been specified yet. HMRC responded that the details of these provisions will be included in the upcoming draft legislation.

One noteworthy thing is that this is not the first time the government has tried to abolish the FHL regime. FHL abolition was announced on the budget announcement of 22 April 2009 to be imposed from 6 April 2010. Although it may not be the case this time, there is a good possibility of history repeating itself.

Conclusion

Furnished Holiday Lettings (FHL) is a tax relief that can be claimed on short-term holiday lettings. The FHL regime has many tax benefits on capital gains tax relief, but this relief led to many people investing only in short-term rentals. Furthermore, this caused a long-term rental crisis, and people not being able to find homes in major cities or tourist areas in the UK. So, to be able to solve this problem, the UK government is abolishing the FHL regime from 6 April 2025.

To be able to differentiate the property letting and trading activities after FHL abolition, OTS suggested a brightline test. However, HMRC rejected the call for a brightline test, claiming that property letting and trading can be determined on the basis of each case law. Having said that, HMRC has yet to release the rules for the transition from the FHL regime abolition.

Prerana
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