With the increasing growth of holiday letting businesses over the past decade, and the marketing of furnished holiday lets made easier with the rise of digital platforms such as Airbnb, the UK now has an estimated 127,000 owners of furnished holiday lets.
In 2025 the current tax perks a furnished holiday let (FHL) property has over a standard UK or overseas property business will be lost, and income from these properties will be treated the same as a long-term let. This change will have a significant impact on those who have invested in short-term property letting, either as an individual or as a business.
Who will be impacted by the abolishment of the FHL tax regime?
The proposed changes will impact any entity owning a furnished holiday let property, including individuals, trusts, partnerships, LLPs and limited companies.
What counts as short-term furnished holiday let?
A short-term furnished holiday let must be available for letting for 210 days and actually let for 105 days or more in each tax year, and can’t be used as a long-term let of over 31 days for significant periods.
The current tax benefits for short-term furnished holiday lets include:
no finance cost restriction, so loan interest is not restricted to basic rate for income tax
capital allowances on new expenditure
reliefs from taxes on chargeable gains for trading business assets
income included within relevant UK earnings when calculating maximum pension relief
When will new rules apply?
Draft legislation published on 29 July 2024 confirms that new rules will come into play from 6th April 2025 for individuals/trusts/partnerships, and 1st April 2025 for limited companies.
What are the tax changes to furnished holiday lets?
FHL property will become part of an individual’s or company’s UK or overseas property business as appropriate. That property business will then include the amalgamated profits and losses of all the properties in that business.
FHL property will no longer be eligible for more beneficial capital allowances treatment but will instead be eligible for ‘replacement of domestic items relief’ in line with other property businesses.
Finance cost restriction rules will apply so that loan interest will be restricted to basic rate for Income Tax.
Income from FHL property will no longer be classed as relevant UK earnings when calculating maximum pension relief
Under current rules, furnished holiday let properties are eligible for roll-over relief, business asset disposal relief (BADR), gift relief, relief for loans to traders, and exemptions for disposals by companies with substantial shareholdings. Under the new rules, eligibility for these reliefs will cease, however, where criteria for these reliefs includes conditions that apply in a future year, these specific rules will not come into effect where the FHL conditions are satisfied before the rules change.
When it comes to BADR, where the furnished holiday letting conditions are satisfied in relation to a business that ceased prior to the start date of the new regime, relief may continue to apply to a disposal that occurs within the normal three-year period following ceasing operation.
The rate of CGT payable on gains qualifying for BADR is set to increase following the 2024 Autumn Budget, increasing from 10% to 14% on 6 April 2025 and then to 18% on 6 April 2026.
Allowances during the transition period
If an existing FHL property has an ongoing capital allowances pool of expenditure, you will be permitted to continue to claim writing-down allowances on that pool, however, any new expenditure incurred on or after the date the new rules are implemented, must comply with the new property business rules.
Losses generated from any FHL property will be permitted to be carried forward and be available for set off against future years’ profits of the relevant property business.
If your FHL accounting period straddles 1 April 2025, for corporation tax purposes, it must be divided into two accounting periods. The split should be made on a time basis, or if that method would produce a result that could be considered unreasonable, then, according to HMRC, “just and reasonable basis” can be used.
Key considerations for furnished holiday let owners
Anyone who owns a furnished holiday let property needs to bear these changes in mind, however some will be impacted more than others, including:
Anyone considering selling a holiday let, or shares in an FHL property company
Properties owned jointly by spouses where there is an unequal split of income
Those who are undertaking renovation work likely to continue into 2025/26 where capital allowance claims need to be considered
Those with FHL losses being carried forward
Those who rely on the income as part of their pension planning for pension contributions
Companies who currently qualify as a trading company where the change may change the company trading status to investment
Individuals who have inheritance planning in place with the consideration of business property relief being available on the FHL
What if your FHL business is VAT registered?
Under current rules, an FHL property with income over £90,000 needs to register for VAT, or some FHL property owners may have chosen to register for VAT. While residential lettings exempt from VAT, the treatment for FHLs is not changing and will still be standard rated for VAT.
Is it all doom and gloom?
There are property owners who may benefit from the changes. Those who have mixture of long term rental and FHL property, with unused FHL property losses, will benefit from being able to offset these against their other property income from 2025/26. It will also simplify their tax affairs by not needing two separate records.
Looking ahead to the incoming making tax digital (MTD) plan for self-assessment - this will reduce an individual's reporting requirements. Under the current FHL rules, reporting under MTD would be a large administrative undertaking. An individual with combined gross property/trading income above £50,000 (dropping to £30,00 from 2027/28) will fall under the MTD reporting criteria. This would have meant individuals with both standard UK or overseas property business and FHL property would have to submit two separate reports each quarter, whereas they will only need to submit one report each quarter as a result of the changes.
Additionally, you may want to consider a review of whether a property makes commercial sense or whether it should be disposed of.
What are HMRC’s anti-forestalling rules
Anti-forestalling measures are there to stop parties trying to engineer transactions to gain a tax advantage when new legislation is due to be introduced.
The anti- forestalling rules for these FHL changes apply to unconditional contracts entered into after 6 March 2024, but that are not completed by/on 5 April 2025, for individuals, trusts and partnerships, or 31 March 2025 for companies. This means that if you are in the process of selling an FHL property, or shares in an FHL property company, you will qualify for business asset disposal relief under the current rules as long as the transactions are fully completed by the respective dates.
This is going to be a big change for furnished holiday let owners, and it is important that you familiarise with the changes, understand the impact this will have and consider any action you might need to take.
For more information about how the tax changes could impact your furnished holiday letting business and what action you should be taking please call 0808 144 5575 or email help@armstrongwatson.co.uk.
