The Chancellor has confirmed plans to abolish the Furnished Holiday Lettings (FHL) tax regime from April 2025, as draft legislation has been published.
This significant change will eliminate the current tax advantages enjoyed by short-term holiday let landlords compared to those managing standard residential properties, such as buy-to-let long-term tenancies.
The Government anticipates raising an additional £35 million in tax revenue in the 2025-26 fiscal year, with this amount expected to rise to £245 million by 2028-29.
Current tax benefits
FHL owners are currently entitled to several valuable tax incentives, including:
- Capital allowances – Claim up to £1 million in capital expenditure under the Annual Investment Allowance (AIA).
- Business Asset Disposal Relief (BADR) – Benefit from a lower tax rate on gains if FHL activities qualify as a business.
- Expense deductions – Full deductions for expenses such as mortgage interest, significantly reducing taxable profits.
- Earned income classification – Income from FHLs is treated as earned income, qualifying for relief at the owner’s highest Income Tax rate.
What’s Changing?
From 6 April 2025, income and gains from FHLs will be treated like those from other property businesses, affecting both income tax and capital gains tax (CGT).
The new rules mean that:
- Interest deductions for FHLs will be restricted to the basic rate of Income Tax.
- You will no longer be able to claim allowances for new capital expenditures. However, you can still claim relief for replacing domestic items.
- Income from FHLs will no longer count as UK earnings for pension relief calculations.
- The ability to split profits on jointly owned FHLs based on ownership shares will be removed, bringing it in line with standard property rules.
What should you consider doing before the changes take effect?
If you haven’t claimed capital allowances on your FHLs yet, then you should act now.
Even if your FHL is currently running at a loss, claiming these allowances can increase your reported loss, which may offset future profits.
You are still able to claim allowances for past expenditures while your FHL business remains active.
If selling your property was already on your agenda, doing so now could benefit from the current 10 per cent Capital Gains Tax relief under Business Asset Disposal Relief (BADR).
Transitional rules
If you’re in the middle of a project and have already been claiming capital allowances, you can continue to use those allowances for any costs incurred before the new rules come into effect.
Additionally, if you have losses from your FHL business that you haven’t yet used, you can carry these forward and apply them to future profits from either UK or overseas property businesses.
If you own a furnished holiday let and need advice on how these upcoming changes may affect you, please get in touch.