Furnished Holiday Lets

The abolishment of the Furnished Holiday Let (FHL) regime ended on 5 April 2025 and in this article we will provide an overview of the changes and how they may impact your property business.

The changes align FHL with the tax rules for other residential property investment, such as standard buy to lets or Homes of Multiple Occupancy (HMO) and the changes impact multiple taxes which need to be considered.

Income Tax

Finance Charges

Previously, all finance charges were a deductible expense when calculating the FHL business profits. This meant the owner received tax relief in their marginal tax band, which could have been up to 45%.

From 5 April 2025, finance charges are no longer deducted against profits, instead a 20% tax reducer is offset against the tax due on the FHL profits. Below is an example of how the tax is calculated.

Impact of tax relief on Finance Charges.

Tax payer is a 40% taxplayer.

The impact here is the finance charges only attract 20% tax relief whereas previously it was at 40%

Other factors to consider

In the above example, the deemed profits from 5 April 2025 are deemed to be much higher now the finance charges are no longer deducted.

This could impact the following

• Tax rate paid – if previously you have been just below the next tax bracket, the inflated profit figure may push you into the higher tax bracket. This can also affect your personal allowance if your income has previously been just below £100,000, the inflated profits may push your income above £100,000 where you will start to lose the tax-free personal allowance.
• Child Benefit – if you or your partner receive child benefit, the increased profit may push your income above £60,000 and the child benefit may start to need to be repaid in some proportion.
• Costs included – This includes all finance charges and not just mortgage interest. It will also include costs such as arrangement fees and costs to obtain finance.
• Making a loss – There are unfortunately scenarios where you can make a cash loss, but still have tax to pay, particularly where you have high interest rates and charges and maybe carry out a large refurbishment in the year.
• FHL in a Limited Company – If you hold FHL in a limited company, these changes do not apply, and the finance charges are still deducted in full when calculating total profits.

Capital Allowances

Initial Purchase

When purchasing a FHL, it was possible to make a capital allowance claim for the integral features of the property. This enabled a proportion of the property purchase price to be offset against the rental income in year one. In most cases, this created a large loss which could be carried forward to be offset against future profits.

From 5 April 2025, this claim is no longer possible.

It is worth noting if you have made a claim before 5 April 2025 and still have losses to carry forward, these losses will continue to be carried forward and can be offset against your property portfolio.

Other Capital Allowances

When purchasing domestic items such as furniture, equipment and appliances for the property, you were able to claim a full tax deduction under the capital allowance regime.

From 5 April 2025, domestic items for the property come under the replacement rules. Where items in the property are replaced, the cost of the replacement can be offset in full.

This is particularly relevant when you are looking to purchase a new FHL and intend on purchasing significant amounts of new domestic items. If the initial items are not replacing another item, there is no tax relief.

Losses

Because they are now under the same regime, buy to let and FHL losses can be offset against each other as required. Previously a FHL loss could only be offset against FHL profits and the same with other residential rental income. This could accelerate the use of losses and therefore the tax relief obtained.

Jointly Owned Property

FHL profits have been considered business income, so individuals could decide how to split the income on a commercial basis. If spouses owned a FHL and only one of them managed the property, it could be decided between them this individual would receive the property profits.

From 5 April 2025, the income is in line with ownership, regardless of each spouse’s involvement.

The underlining property ownership would need to be changed in order to vary the profit split, which involves a declaration of trust and form 17 filed with HMRC.

A change in ownership between spouses is exempt for Capital Gains, but it may have Stamp Duty Land Tax, Legal and mortgage implications so careful planning should be undertaken before proceeding with any changes.

Capital Gains Tax

The calculation of capital gains remains the same and doesn’t differ from other residential property investment properties when sold. There were previously some reliefs available to FHL sales which are no longer available.

Business Asset Disposal Relief (BADR)

When selling a FHL business prior to 5 April 2025, the Capital Gains Tax Rate would be 10% up to £1m lifetime gains, where certain conditions were met.

Any future gains from sales are likely to result in a tax rate of either 18% or 24%, depending on other income in the year. If you sell a property that was previously in a FHL business that ceased prior to 5 April 2025, you may still get the 10% BADR rate. If you are unsure, please check with us.

Gift Relief

When gifting a qualifying FHL, it was possible to defer your gain to the new owner, resulting in no Capital Gains Tax paid when the property was gifted.

From 5 April 2025 all gifts will be a deemed disposal at full market value and any tax due on gains due within 60 days of the gift.

Rollover Relief

Gains on the sale of a FHL could be rolled over where the proceed were reinvested in a qualifying purchase, such as a new FHL.

This is no longer possible, so the tax on any gain is due within 60 days, regardless of what the proceed are used for.

Other considerations

Pension Contributions

FHL profits were considered relevant income for pension purposes and contributed to the calculations of maximum pension contributions in a tax year.

This is no longer the case so the maximum annual pension contributions possible may have been reduced.

VAT

While the FHL regime has been abolished, the supply for VAT purposes remains unchanged, so the supply of short-term letting is still a vatable supply.

If gross income from short term let income is above £90,000 in a 12-month period, you will still need to register for VAT.

Recommendations

It is likely the biggest initial impact from these changes is the restriction of tax relief for finance changes if you have mortgages on your FHL properties. It is important to assess the impact this will have on the tax you will need to pay and budget accordingly.

When buying domestic items, keep detailed records of replacement items to ensure that you maximise the amount that can be claimed, particularly when purchasing a new property that may have domestic items left in the property.

If you are unsure or want to assess the impact the changes may have for your Furnished Holiday Let business, please contact me or your usual contact here at Albert Goodman.