If you own a furnished holiday let (FHL) in the UK, it’s essential to be aware of the tax changes for the 2025/26 tax year. The government has recently revised the tax treatment of FHLs, making significant changes that could affect your tax planning. This guide explains the changes, what remains the same, and how they may impact you as an FHL owner.
What Is a Furnished Holiday Let?
To qualify as an FHL, your property must meet specific criteria set by HMRC. This includes proving that you are running a genuine commercial holiday letting business and not just using the property as a second home. The key requirements for your property to qualify as an FHL are:
- Availability for Commercial Renting: Your property must be available for at least 210 days (30 weeks) during the tax year.
- Rented Out as Holiday Accommodation: It must be rented for at least 105 days (15 weeks) during the year, excluding lettings to family or friends at reduced rates.
- Furnished: The property must be furnished to a suitable standard for holiday accommodation.
FHLs located in the UK or within the European Economic Area (EEA), including countries like Iceland and Norway, are eligible. Properties that are used for long-term lets, where the total number of lettings over 31 days exceeds 155 days annually, will typically disqualify the property as an FHL.
How Have the Tax Advantages for FHLs Changed?
Previously, FHLs enjoyed several tax benefits that standard rental properties did not. However, from April 2025, the tax regime for FHLs has been overhauled. Below are some key changes that may impact your tax liabilities:
Income Tax Changes
- Mortgage Interest Deductions: FHL owners used to be able to fully deduct mortgage interest from their rental income, without any restriction. However, starting in April 2025, this benefit will no longer apply, and mortgage interest relief will now be limited to a 20% basic rate tax credit.
- Capital Allowances: FHLs were previously allowed to claim capital allowances on items like furniture and fixtures. This has now been replaced by the “Replacement of Domestic Items Relief,” which only allows relief for the replacement of furniture and appliances. The ability to claim for new purchases or capital improvements has been eliminated.
- Pension Contributions: FHL income previously counted as ‘relevant earnings’ for pension contributions, allowing for higher contributions and immediate tax relief. From April 2025, this is no longer the case.
- Loss Relief: Losses from an FHL could once be offset against future profits. From April 2025, these losses will be combined with other property losses and can only be used against future income from any property.
- Profit Allocation for Spouses: Previously, couples who co-owned an FHL could choose how to split profits. Starting in April 2025, profits will automatically be split 50:50, unless a formal declaration (Form 17) is made to HMRC with evidence of unequal ownership.
Capital Gains Tax (CGT) Changes
Before April 2025, FHL owners could benefit from reliefs like:
- Business Asset Disposal Relief (BADR): This relief allowed FHL owners to pay only a 10% tax rate on capital gains when selling the property.
- Rollover Relief: This allowed FHL owners to delay CGT by reinvesting profits from the sale of one property into another qualifying asset.
- Gift Holdover Relief: This enabled landlords to gift an FHL without triggering tax liability until the recipient sold the property.
These CGT reliefs have been removed for FHLs, meaning any profits from selling an FHL will be taxed at standard residential property rates, which are currently 18% for basic-rate taxpayers and 24% for higher-rate taxpayers.
What Tax Advantages Remain for FHLs?
While some tax advantages have been abolished, several benefits remain in place for FHL owners:
- Business Rates and Council Tax: FHLs may still opt to pay business rates instead of council tax if they meet certain criteria. This can allow them to apply for Small Business Rate Relief, potentially reducing their business rates to zero.
- VAT Benefits: FHLs are still considered commercial properties for VAT purposes. VAT-registered FHL businesses can reclaim VAT on expenses such as cleaning, utilities, and even the purchase of furniture.
What Caused the Changes to the FHL Tax Regime?
The government implemented these changes to level the playing field between holiday rentals and traditional long-term rental properties, which were not subject to the same tax advantages. The move also aims to address housing shortages in popular tourist areas, encouraging property owners to make more properties available for local residents rather than turning them into holiday lets.
When Did the New FHL Tax Rules Take Effect?
The new rules for FHLs came into effect on:
- 6 April 2025 for income tax and capital gains tax for individuals.
- 1 April 2025 for corporation tax for companies.
Anti-forestalling rules were also introduced on 6 March 2024 to prevent people from trying to sell properties under the old tax regime to benefit from CGT reliefs.
Changes to Deductible Expenses for FHL Owners
The types of deductible expenses for FHL owners have also changed. Here’s a breakdown of what’s still deductible and what’s no longer eligible:
What’s Still Deductible
Many operating expenses are still deductible for FHLs, including:
- Utilities (gas, electricity, water)
- Cleaning and laundry services
- Maintenance and repairs
- Marketing and advertising
- Insurance premiums
- Agent’s fees for property management
- Accountancy fees
- Loan interest (subject to the new 20% basic rate tax credit limit)
What’s No Longer Deductible
- Full mortgage interest relief
- Capital allowances on furniture and fixtures (replaced by the Replacement of Domestic Items Relief)
Important Considerations for Holiday Let Owners
From April 2025, FHL income will no longer be reported separately in the Self-Assessment tax return. Instead, it will be combined with all UK property income and expenses as part of a single “UK property business.” This means that meticulous record-keeping is more important than ever to accurately calculate your tax payments.
If your business is VAT-registered, keep an eye on your turnover to ensure you meet the VAT threshold.
Finally, while the tax regime has changed, the legal nature of holiday lets remains the same. Holiday lets are still short-term licenses to occupy, not tenancy agreements, meaning different legal protections apply to both landlords and tenants compared to long-term rentals.
Seek Professional Tax Advice
The changes to the FHL tax regime are significant, and how they affect you will depend on your individual circumstances, business structure, and financial situation. It’s crucial to seek advice from a tax professional to ensure you’re managing your tax obligations effectively and making the most of any remaining tax advantages.
