Furnished holiday lettings tax regime to be abolished from April 2025

In recent years furnished holiday lettings (FHLs) market has seen a meteoric rise with the popularity of platforms such as Airbnb.

From April 2025, the furnished holiday lettings tax regime will undergo significant changes. Previous tax advantages will be removed, and FHLs will be treated the same as other rental properties for tax purposes.

This blog will cover all the key changes to the furnished holiday lettings FHL tax regime.

What is the criteria to qualify as a Furnished Holiday Let?

To qualify as an FHL, there are specific criteria your property is required to meet

To qualify as an FHL, your property must:

• Be let with the intention of making a profit. It’s worth noting that even if it doesn’t make a profit, or you only let it out of season, it will still qualify as a Furnished Holiday Let.

• Contains furniture deemed for "normal occupation" that guests can use during their stay.

• Be located in the UK or the European Economic Area EEA (including Iceland, Liechtenstein and Norway)

Why are changes being made to the FHL tax regime?

The abolition of the Furnished Holiday Lettings (FHL) tax regime was announced in the Spring Budget 2024. In July 2024, when the new Labour government took office, it confirmed that it would continue with the changes announced by the previous government and therefore announced no further changes in the Autumn Budget.

This was bad news for those who run an existing FHL business and let short-term furnished holiday properties. Previously FHLs enjoyed advantageous tax breaks that were not available to those renting out longer-term residential properties.

What are the new tax rules for furnished holiday lettings 2025?

These changes now mean that tax benefits previously given to furnished holiday lettings will be phased out. From 6th April 2025, the changes happen in relation to income tax and capital gains tax for individuals and from 1st April 2025, they will impact corporation tax for companies.

The changes affect any individual, business or trust that operates or sells accommodation classified as FHL.

FHL tax changes from 6th April 2025

Income tax

Under the current tax regime, FHL owners can fully deduct finance costs, such as mortgage interest, against property income. From April 2025, this will be capped at the basic rate of income tax. FHL owners may therefore face increased income tax bills if they own the property personally.

Currently, FHL profits from a jointly owned property can be allocated based on which spouse operates the holiday letting business, and this can lead to better tax efficiency overall. However, from April 2025, allocating FHL profits between joint owners i.e. spouses or civil partners for tax purposes will be removed. This again will potentially result in higher tax bills.

Capital allowances

FHL owners can currently claim capital allowances on furnishings and fixtures that result in more generous deductions compared to other property income. From the 1st April 2025 for Corporation Tax and 6th April 2025 for Income Tax, those who own FHLs will no longer be able to claim capital allowances on new expenditure incurred.

If an existing owner is partway through an ongoing project, transitional rules will apply.

Writing Down Allowances, balancing allowances, and charges can continue to be claimed after April 2025 on pooled expenditure until it is used up or a small pool claim is made.

Capital Gains Tax (CGT) & Business Asset Disposal Relief (BADR)

Under the current regime, if you sell a Furnished Holiday Let (FHL), you may be able to benefit from Business Asset Disposal Relief (BADR). BADR allows the first £1 million of lifetime gains to be taxed at 10%. Also, under the current rules, you can defer paying CGT on your gains by "rolling over" the profit when you invest in certain new business assets.

From April 2025, instead of the lower tax rate for BADR (10%) will no longer apply. Instead, the standard Capital Gains Tax (CGT) rate for residential property (currently 24%) will apply. The option to "rollover" your gains when buying new assets will also cease.

There are no transitional rules for these changes. This means that if contracts were exchanged from 6 March 2024, but completion is not reached until after 5 April 2025 (1 April 2025 for companies), rollover relief and holdover relief will not apply if the transfers are between connected persons.

There may be an exemption for third-party transfers if wholly for commercial reasons, but this will require a disclosure to HMRC.

This is a complex area, so seek help from dns accountants.

Pension contributions and national insurance

Tax relief for pension contributions is limited to the higher of £3,600 or 100% of net ‘relevant earnings’.

From April 2025, FHL income will no longer count as relevant UK earnings when calculating maximum tax relief on personal pension contributions. FHL income will also no longer be classed as relevant earnings in relation to Class 2 and voluntary Class 3 NIC purposes.

Finance and mortgage interest costs

A huge tax incentive for FHL owners currently is that mortgage interest on FHLs is treated as a deduction from rental income for income tax purposes.

However, from April 2025, individual landlords will still obtain relief for finance and mortgage interest costs, but at a much lower basic rate of Income Tax (20%).

Note: These changes do not impact businesses operating FHLs.

Stamp Duty Land Tax

From 31st October 2024, for anyone buying a second property (whether an FHL or not), the rate of Stamp Duty Land Tax (SDLT) surcharge was increased from 3% to 5%. This means the cost of buying second and subsequent properties has increased.

Furnished Holiday Lettings transitional rules

Until the changes happen in April 2025, transitional rules will be in place for FHLs. These transitional rules are summarised below:

• Tax reliefs – Current rules mean that FHLs qualify for reliefs such as Business Asset Rollover Relief, Business Asset Disposal Relief and Gift Holdover Relief. Until these reliefs cease from 6 April 2025, existing qualifications for these reliefs will remain unaffected.

• Business Asset Disposal Relief (BADR) – Where the FHL conditions are met for a business that ceased before the commencement date, BADR may be applied to asset disposal occurring within the normal three-year period following cessation.

• Capital allowances – From April 2025, expenditure on holiday lets will not qualify for claiming capital allowances. However, capital allowance claims made prior to April 2025 can continue to be claimed over time. Writing Down Allowances, balancing allowances, and charges can be claimed after April 2025 on pooled expenditure until it is used up or a small pool claim is made.

• Carried forward losses – Currently, losses from FHLs can be offset against future FHL profits. Losses generated from an FHL business will be permitted to be carried forward and be available to offset against future years’ profits of either the UK or overseas property business as appropriate.

• Anti-forestalling provisions – From 6th March 2024, an anti-forestalling rule was applied to prevent FHL owners from obtaining a tax advantages through the use of unconditional contracts for CGT relief under the current tax rules.

How do the 2025 tax changes for FHLs impact owners?

With the abolition of the preferential tax incentives relating to FHL properties, there will be widespread tax implications for FHL owners. The changes will impact future profits, tax planning strategies and may see some owners deciding to leave the furnished holiday lettings market altogether.

However, for those owners that remain in the furnished holiday lettings market that run other property businesses or own other rental properties, the new rules will simplify the reporting process.

What can FHL owners do before April 2025 to mitigate some of the issues arising from FHL tax changes?

For some FHL owners there may be opportunities to maximise the tax benefits of your FHL before Aprils 2025. These are as follows:

• Mortgages: If your FHL has a mortgage on it, then you could potentially refinance, adjust loan terms, or look to reduce your mortgage debt overall on any FHLs you own.

• Capital Allowance expenditure: You could consider carrying forward existing capital allowances pools in order to claim writing-down allowances on that pool and claim capital allowances before 6th April 2025 on fit-out and refurbishment expenditure.

• Selling your property: If your property qualifies for Business Asset Disposal Relief and you are considering selling your property, consider selling the property prior to April 2025. This would allow you to benefit from only paying 10% on the gain after allowances instead of the 18% or 24% rates that will apply from April 2025.

• Pensions: With FHL profits no longer qualifying as relevant earnings for pension contributions, it’s worth considering funding sources for pensions.

How dns can help FHL owners

The abolition of the Furnished Holiday Lettings regime has a huge impact for FHL owners, their income, profits and tax bills.

If you need help and advice on the tax implications of the FHL changes in April 2025, our property team can help. Here at dns accountants, we are specialised accountants for property owners.

Our team can advise on short and long-term tax strategies that will save tax on your property portfolio.

Whether you own one or more properties, contact us for help and advise by calling 03330601807, or email us at enquiry@dnsaccountants.co.uk.

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