Repeal of Furnished Holiday Lettings Rules: Key Information for Landlords

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The rules governing Furnished Holiday Lettings (FHL) are set to be abolished from 6 April 2025 for Income Tax and Capital Gains Tax (CGT) and 1 April 2025 for Corporation Tax on FHL income and chargeable gains. This significant change removes the tax advantages currently available to FHL landlords, aligning the treatment of short-term holiday lets with other residential property businesses. Below, we outline the key changes, transitional rules, and the impact on landlords.

Contents

• Current FHL Rules and Their Benefits
• Changes from April 2025
• FHL Rules for 2024/25
• Loss Relief
• Capital Allowances
• Capital Gains Reliefs
• Jointly Let Properties
• What Should Landlords Do Next?

Current FHL Rules and Their Benefits

Under the existing regime, FHLs benefit from several tax advantages compared to standard residential rental properties. These include:

1. Finance Cost Relief – Unlike other residential lettings, FHL landlords can currently deduct mortgage interest in full from FHL rental income.
2. Capital Allowances – Relief is available for capital expenditure in respect of furniture, fixtures and equipment (with varying treatment under either the cash basis or accruals basis).
3. CGT Reliefs – FHLs qualify for CGT reliefs usually reserved for trading businesses, including Business Asset Disposal Relief (BADR), Gift Relief and Rollover Relief.
4. Pension Earnings – Profits from FHLs count as relevant UK earnings for pension purposes.

Changes from April 2025

The repeal of FHL rules means these tax advantages will be removed. Key changes include:

• Finance Cost Restrictions – Interest on loans related to holiday lets will no longer be deductible in full; instead, relief will be restricted to the basic rate (as with other residential property income).
• Capital Allowances Removed – Expenditure on new furnishings will no longer qualify for capital allowances, but instead Replacement of Domestic Items Relief will apply.
• CGT Reliefs – Reliefs such as Business Asset Disposal Relief (BADR), Rollover Relief, and Gift Hold-Over Relief will no longer be available.
• Pension Earnings - No longer including this income within relevant UK earnings when calculating maximum pension relief.
• Income Allocation for Joint Owners – From 6 April 2025, profits and losses from FHL properties held jointly between married couples / civil partners will be taxed in equal shares unless an election is made to be taxed according to actual ownership shares.

FHL Rules for 2024/25

The FHL rules will remain in place for the 2024/25 tax year, with qualifying criteria applied as follows:

Occupancy Condition

• Income Tax: For ongoing lets, the standard occupancy tests apply to the full tax year. For new lets, tests apply to the first 12 months of letting.
• Corporation Tax: Tests apply based on the company's accounting period.

Averaging & Period of Grace Elections

• Averaging Elections: If multiple properties are let and one does not meet the 105-day letting condition, an election can be made to average the occupancy across all FHLs.
• Period of Grace Election: If a let does not meet the occupancy test but was genuinely intended to meet this condition, an election may allow it to still qualify.

Both elections remain available for the 2024/25 tax year before the rules are repealed.

Loss Relief

Currently, losses from a UK FHL business and an EEA (European Economic Area) FHL business are treated separately and cannot be offset against each other or against other (non-FHL) rental income.

New Rules for Income Tax (From 6 April 2025)

• All UK property rental losses (including those from former UK FHLs) will become part of the general UK property business and can be set off against other UK property income.
• All overseas property rental losses (including those from former EEA FHLs) will become part of the general overseas property business and can be set off against other overseas property income.

New Rules for Corporation Tax (From 1 April 2025)

• All UK property rental losses (including those from former UK FHLs) will become part of the general UK property business and must first be set against total company profits in the same accounting period, before any excess is carried forward.
• All overseas property rental losses (including those from former EEA FHLs) will become part of the general overseas property business and can only be set against future overseas property profits.
• Unlike UK property business losses, overseas property losses cannot be offset against total profits—they remain ring-fenced within the overseas property business.

Capital Allowances

At present, FHLs are treated in the same way as a trade for capital allowances purposes, allowing owners to claim Plant & Machinery Allowances (PMAs) on qualifying items such as furniture, white goods, and fittings.

New Rules for Capital Allowances (From April 2025)

• A UK or EEA FHL business will no longer qualify as a separate qualifying activity for PMAs.
• Instead, properties will fall under the general property business rules, which exclude capital allowances on items used in a dwelling-house.
• From 6 April 2025 (Income Tax) and 1 April 2025 (Corporation Tax), capital allowances can no longer be claimed on new purchases of plant or machinery for holiday lets.
• Instead, landlords may claim Replacement of Domestic Items Relief, which provides relief on a like-for-like replacement basis but excludes initial purchases.

Transitional Rules for Existing Capital Allowances

To ease the transition, special provisions allow unrelieved expenditure on qualifying items from an FHL business to transfer to the corresponding UK or overseas property business. This means:

• The property owner is not treated as having disposed of plant or machinery simply by virtue of the above changes.
• Instead, any existing capital allowances pools will be carried forward and you will be able to continue to claim writing-down allowances on that pool.
• Short-life asset elections made in relation to FHL property will also continue to apply after the transition.

Capital Gains Reliefs

Under the existing regime, FHLs benefit from favourable capital gains reliefs, as they are treated similarly to trading businesses for CGT purposes. These reliefs include:

• Business Asset Disposal Relief (BADR) (previously Entrepreneurs’ Relief) – currently reduces CGT to 10% on qualifying disposals, compared to the standard 24% CGT rate for higher or additional rate taxpayers selling chargeable residential property.
• Rollover Relief – defers CGT when reinvesting sales proceeds into new qualifying business assets.
• Gift Hold-Over Relief – defers CGT when business assets are given away or sold for less than market value, allowing the recipient to inherit the held-over gain.
• Relief for Loans to Traders – allowing CGT relief for unrecovered loans made to a trading FHL business.

From 6 April 2025 (1 April 2025 for Corporation Tax), the special treatment of FHLs will be abolished, and these reliefs will no longer be available for FHL businesses.

Business Asset Disposal Relief (BADR)

• BADR will not be available for disposals of FHL businesses on or after 6 April 2025.
• Similarly, BADR will no longer apply to share disposals in a company that ceases to qualify as a trading company due to the abolition of the FHL rules.
• However, BADR may still be available if the business actually ceased before 6 April 2025, and is disposed of within the applicable timeframes.

Rollover Relief (Replacement of Business Asset Relief)

• Rollover relief will no longer be available when acquiring a new asset for an FHL business after 6 April 2025.
• However, a relief claim may still be available where an asset used in an FHL business was disposed of before 6 April 2025, and the proceeds are reinvested into a replacement asset used in a (non-FHL) trade.

Relief for Loans to Traders

• From 6 April 2025, claims for capital gains relief under TCGA 1992, s253 in respect of irrecoverable loans to FHL businesses will no longer qualify.
• However, relief may still be available where the loan was made before 6 April 2025, provided the debt was already irrecoverable by that date.
• In such cases, a claim can treat the loss as arising either in the year the claim is made or in one of the two preceding tax years — but only if the earlier time specified is also before 6 April 2025.

Anti-Forestalling Rules

To prevent tax planning arrangements that attempt to retain capital gains reliefs beyond April 2025, an anti-forestalling rule applies where:

1. An unconditional contract to sell an FHL business or shares is entered into before 6 April 2025.
2. The contract completes on or after this date.
3. A claim is made for BADR, Rollover Relief, or Gift Hold-Over Relief (s165 TCGA 1992).

If these conditions apply, the date of disposal for capital gains purposes does not change but the FHL business will not be treated as a trade at that date with the result that the relevant relief will not be available.

However, the anti-forestalling rule does not apply if:

• the contract was not entered into for the purpose of avoiding the effect of the FHL abolition, and
• either:
• the contract was entered into wholly for commercial reasons, or
• the parties to the contract are not connected persons,
• and the claim includes a statement confirming that these conditions are met.

Jointly Let Properties

From 6 April 2025, holiday lets will no longer benefit from the separate FHL rules and will instead be treated as standard property income for tax purposes. This change affects how income and losses from jointly owned properties are reported.

In general, profits and losses are split in proportion to ownership, unless the joint owners have formally agreed a different allocation. The tax treatment must reflect the actual share of income agreed between the parties.

However, special rules apply to spouses and civil partners. From 6 April 2025, income from jointly owned holiday let properties will be treated as arising equally between them — regardless of their actual ownership share — unless both of the following conditions are met:

• They hold the property and are entitled to the income in unequal shares, and
• They submit Form 17 to HMRC, electing to be taxed in accordance with their actual ownership proportions.

Form 17 must be filed within 60 days of making the declaration of unequal shares to HMRC. Without this election, income (and losses) will continue to be assessed on a 50:50 basis.

What Should Landlords Do Next?

If you currently own and let a qualifying FHL property, it’s important to start planning for the upcoming changes. Here are some key actions to consider:

• Review your future tax position: From April 2025, FHLs will lose access to a range of tax reliefs. Assess how this could affect your income tax, capital gains tax, and pension contributions.
• Consider timing of capital expenditure: Capital expenditure made before 6 April 2025 may still qualify for capital allowances under the existing rules. This could include furniture, white goods, or other plant and machinery.
• Consider selling before 6 April 2025: If a sale is still possible before 6 April 2025, it may qualify for Business Asset Disposal Relief (BADR), potentially reducing CGT to 10%, subject to eligibility.
• Think about succession: If passing the property to family, gifting before April 2025 may allow access to Gift Hold-Over Relief — though this has both CGT and possible IHT implications.
• Keep records up to date: Accurate letting records are essential to support FHL status for 2024/25 and any final claims for reliefs or elections.
• Seek tailored advice: Tax implications vary depending on your circumstances, so it's best to consult a professional before making decisions.

Get in Touch

The repeal of the FHL rules represents a fundamental shift in how holiday lets are taxed, removing key tax benefits that have been in place for years. For landlords currently benefiting from the FHL regime, planning is crucial to navigate these changes effectively.

For more information or to discuss how these changes impact your tax position, contact us today to arrange a free initial consultation.

This article provides general information and should not be considered professional advice. It reflects legislation and practices at the time of writing, which may change. Individual circumstances vary, so please consult us before taking any action. We accept no responsibility for financial loss arising from actions taken without our written advice.

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AUTHOR

Liam O'Riordan

As Principal at Veritas ATS, I help start-ups, owner-managed businesses, and individuals simplify accounting and tax, providing clear, practical solutions tailored to their needs.

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