Furnished Holiday Lettings – Tax Implications on Cessation

The changes to FHLs in Scotland has resulted in uncertainty for FHL business owners.  The options going forward can be summarised as follows: 

• Apply for a licence/planning permission and continue to operate the FHL.

• Discontinue the FHL business and let on a long-term residential basis.

• Discontinue the FHL business and either leave the property vacant or sell.

The most attractive option from a financial point of view may be to convert to a long-term residential let given the high demand for rental property, reduced costs and stability of income. However, property owners will need to be aware that this may have tax implications, as follows:

Income Tax

• The FHL business will cease and there will be the commencement of a new long-term let business.

• Relief for loan interest payments may be restricted.

• There will be no carry forward of losses from the FHL business.

• A balancing charge may arise.

• Income will no longer be regarded as relevant earnings for pension purposes.

Capital Gains Tax

• The property will no longer be eligible for holdover relief or rollover relief.

• Business asset disposal relief will no longer be available - a gain arising will be liable to the CGT at the residential property rates (18%/28%).

• A property on which a claim for rollover relief has previously been made will have a lower base cost.

Inheritance Tax

• Property held as part of a larger business will fall on the investment side and it may become more difficult to claim IHT relief on the whole business.

VAT

• Income from a residential property letting is exempt from a charge to VAT. It may be necessary to deregister from VAT.

• The transfer of a going concern (TOGC) provisions will need to be considered.

If you have a FHL business and would like advice on the tax implications of converting to a long-term let, please get in touch.