Furnished holiday let tax changes

The Government is abolishing multiple reliefs which have been in place for FHL owners to bring tax rates in line with those paid by owners of other rental properties.

Under the old rules, FHLs were seen as short-term lets, so qualified as a furnished holiday let under trade purposes. Owners could claim rate reliefs and capital allowances on furniture and rates were beneficial for inheritance tax purposes.

However, the UK government has announced the abolition of the furnished holiday lettings tax regime on April 6, 2025, for income tax purposes, and on April 1, 2025, for corporation tax purposes.

As an Associate Director at Prime, I have more than a decade’s experience advising on tax affairs and lead our expert personal tax compliance department.

Here, I answer some of the most frequently asked questions about the upcoming changes to furnished holiday let tax rules. If you have a question about your tax compliance as a landlord, please don’t hesitate to get in touch.

Why are the furnished holiday let tax rules changing?

The Government will see this tax change as a way of making things fairer, by making rates more aligned with residential lets.

They will have considered the situation in popular holiday destinations such as Cornwall, and see it as a way of deterring people from snapping up holiday homes in areas of the UK where people may be less able to afford to buy their own homes.

It’s a win-win for HMRC, because it has the dual effect of making FHLs less appealing, while also making landlords consider turning those properties they already own into long-term lets.

How much tax will I pay on my furnished holiday let?

The furnished holiday let tax increase will be around £1,400 per year, based on a higher rate taxpayer generating gross rents of £25,000 and paying expenses of £8,700.

Based on expenses of:

• mortgage interest (£5,000)
• new furniture (£1,000)
• repairs (£600)
• cleaning (£600)
• management fees (£1,500)

the owner would generate a taxable profit of £16,750 and would have paid £6,700 in tax under the old regime.

However, using the same scenario following the abolition of the furnished holiday lettings tax regime, the same taxpayer would now be liable to a tax bill of £8,100.

What are the key changes to furnished holiday let tax rules?

The key changes which FHL owners will need to consider from April are:

1. Capital Allowances on new expenditures can no longer be claimed. Owners will have to revert to domestic items relief for replacing items such as washing machines and furniture
2. Finance Costs – individual landlords can still obtain relief for finance and mortgage interest costs, but only at the basic rate of income tax (20 per cent) – the same as other landlords. Before they could claim loan interest as a full deduction, meaning they would benefit at their highest tax rate
3. Losses incurred on a FHL can be carried forward and offset against future profits from the same property business, whether in the UK or overseas. After the abolition, losses will now be aggregated with all other UK rental properties and offset against the first available profits
4. Capital Gains Tax (CGT) – The option to defer furnished holiday let Capital Gains Tax by reinvesting in new business assets has been abolished. In addition, the lower tax rate for Business Asset Disposal Relief (BADR) will no longer apply, so the standard CGT rate for residential properties will be applicable on any future disposals
5. Pension contributions and National Insurance – FHL income will no longer count as relevant UK earnings for calculating maximum tax relief on personal pension contributions and for Class 2 and voluntary Class 3 National Insurance contributions