Taxation of Furnished Holiday Lets (FHL) in a Company

Furnished Holiday Lets (FHL) have been a widely popular investment option in the UK, as it allows property owners to generate income by renting out their properties as holiday accommodations. FHLs are unique in that they are subject to specific tax rules, which are quite different to other types of property rental businesses.

However, following the announcement in the spring budget of 2024 that the FHL regime would be abolished, many investors have started reconsidering this type of investment. With the abolishment, FHLs will be treated as ordinary property income, stripping them of the special benefits they enjoyed under the previous rules. This significant change has prompted numerous FHL owners to re-evaluate their business structures, with many considering transferring their FHLs into a limited company to potentially mitigate the impact of these new tax changes.

But how exactly will the property be taxed under company? Let’s find out.

Corporation Tax Rates

Companies do not pay income tax on their profits at the personal rates of 20% to 45%. Instead, they are subject to corporation tax, at either 19% or 25%, depending on the company’s taxable total profits.

Taxable total profits cover all profits from trading as well as property income, which includes income from Furnished Holiday Lets (FHLs) if the company owns any. In addition to the profits from different sources, the taxable total profits would also include any capital gains on the disposal of any assets.

Here’s how corporation tax is structured:

• Companies making up to £50,000 in profits are taxed at 19%.
• For profits ranging from £50,000 to £250,000, the tax rate starts at 19% for the first £50,000 and then increases progressively to 26.5% for the remaining profit within this bracket.
• If the company’s total taxable profits exceed £250,000, the tax rate on all profits is a flat 25%.

Stamp Duty Land Tax (SDLT)

Stamp duty land tax (SDLT) is a tax charged by HMRC on land or property purchases in the UK. Whether the purchaser is an individual or a company, the transaction would fall within the scope of SDLT, and its compliance cannot be avoided if the chargeable consideration of the property is above the SDLT threshold of £40,000. There is on particular rule within SDLT for FHLs and the typical rules apply.

For companies that already own Furnished Holiday Lets (FHLs), SDLT would not apply unless there's a transfer of ownership. However, individuals who consider transferring an existing FHL into a limited company need to be prepared for SDLT, which for companies includes a surcharge of 3% above the standard rates for individuals, also known as the higher rates. Here’s a breakdown of these rates:

What is worse is that companies face an SDLT rate of 15% on the total property value if it exceeds £500,000. However, HMRC does provide relief from this 15% rate under certain conditions, such as for property rental businesses or property developers. If you're wondering about possible exemptions from the 15% rate, these reliefs may apply depending on the nature of your business and its activities. As a result, companies will pay SDLT at the higher rates illustrated above.

It’s crucial to note that companies must submit SDLT returns to HRMC and pay the SDLT bill within 14 days of the ‘effective date’ of the purchase.

Capital Allowances

A tax treatment identical between companies and FHLs is the capital allowance. Capital allowances are a type of tax relief, allowing businesses to deduct some of all of the value of an item from the taxable profits until they are written off or sold. You can understand capital allowance as a depreciation. Capital allowances can be claimed on plant and machinery, such as equipment, machinery, and business vehicles used within the business.

For companies operating Furnished Holiday Lets (FHLs), it may be appealing to claim capital allowances for all purchased items. However, care must be taken as inaccurate claims can lead to penalties. Therefore, consulting with professional accountants is recommended to ensure compliance and avoid potential issues.

Interested in learning more about the specific types of capital allowances you can claim as a property investor? Explore our detailed article on capital allowances for property investors.

Capital Gains Tax (CGT): Do companies get Business Asset Disposal Relief (BADR)?

As previously mentioned, companies don't have a separate capital gains tax rate like individuals do. Instead, capital gains are incorporated into the total taxable profits and are subject to the corporation tax rates of 19% or 25%, depending on the taxable total profits.

Under the FHL regime, disposal of property qualifying for FHL would be treated as though it were a trade, and such disposals would be eligible for Business Asset Disposal Relief whereby gains up to £1 million would be taxed at 10%, provided certain conditions are met.

However, BADR is not available to companies. As a result, companies selling their FHLs would pay the capital gains tax at either 19% or 25%, in contrast to individuals who would pay CGT at 10 – 20% for commercial properties and 18 - 24% for residential properties. Determining whether FHLs fall into the former or latter category can be complex.

Value Added Tax (VAT)

There are no specific VAT rules that solely apply to FHLs. Instead, FHLs are accounted under VAT legislation as holiday homes, like hotel accommodation and similar establishments. Holiday homes refers to accommodations advertised or held out as suitable for holiday or leisure use. Therefore, the abolishment of FHL has no impact on how the FHL should be treated under VAT, as long as the services provided still qualify as holiday accommodation.

FHL operating companies should also be aware of the Tour Operator’s Margin Scheme (TOMS) if the services supplied also include taxis, tour guides, etc. Under TOMS, VAT is accounted not on the sales from the business but on the profit margin.

Conclusion

Following the decision to abolish the Furnished Holiday Lets (FHL) regime, property investors are adapting their tax strategies. FHL properties will now be taxed under standard property income rules, leading investors to reconsider how they manage their investments. Some are considering setting up limited companies to benefit from fixed corporation tax rates, but this change also means losing certain tax reliefs and potentially facing higher Stamp Duty Land Tax (SDLT) rates. As investors adjust to these shifts, it's crucial to seek professional advice to navigate these tax changes effectively and make informed decisions in the evolving UK property market.