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HMRC rejects ‘brightline’ test for furnished holiday lets (FHLs)

Author: ICAEW Insights

Published: 13 May 2024

In response to ICAEW’s letter on the abolition of the FHL regime, HMRC has confirmed that the boundary between property letting and trading will be judged on the facts and by reference to case law.

At the Spring Budget 2024, the Government announced that the special tax regime for FHLs will be abolished from April 2025. Before the FHL rules were introduced, the boundary between property letting and trading for a short-term holiday rental business had been in doubt. This caused uncertainty for taxpayers, and a number of cases were heard on the subject. 

In a letter to HMRC, ICAEW’s Tax Faculty called on the Government to consider introducing a ‘brightline’ test. The test had been proposed by the Office of Tax Simplification in 2022 in the event that the FHL regime was abolished. The Tax Faculty believes that a brightline test in the legislation will make it clear whether property letting activities qualify as a trade. It may also be helpful for inheritance tax (IHT) purposes in establishing whether business property relief (BPR) is due.  

In its response, HMRC has rejected ICAEW’s call for a brightline test. HMRC believes that the test would have downsides. For example, it could mean that more activities would be considered as trades. HMRC confirmed that whether an activity is trading or property letting will be determined on the facts, with reference to the guidance provided by the courts. HMRC does not anticipate that the abolition of the FHL regime will affect the application of BPR. HMRC’s view, as expressed at IHTM25278, is that FHLs will in general not qualify for BPR.  

ICAEW pointed out that its members are keen to understand if and how transitional provisions will apply in respect of capital allowances and losses. HMRC responded that details of the transitional provisions will be set out in draft legislation and accompanying documents soon.  

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