Richard Curtis warns that owners of furnished holiday lettings should be aware of recent tax changes.
For many years, unlike normal rented properties, the rent from a furnished holiday letting (FHL) was treated as trading rather than investment income, which had several tax benefits.
Broadly, a property could be treated as an FHL if, in each tax year, it was available for short-term letting for 210 days and was in fact, let for 105 days or more and it was not used as a long-term let of more than 31 days for significant periods.
Unfortunately, this distinction and the accompanying tax advantages ceased to have effect from 6 April 2025 (or 1 April if the property was owned by a company) and the rent received will now be treated the same as for any other let residential property. The main effects are outlined below.
Income tax
Although the rent from an FHL property was subject to the same rates of income tax as any other letting, the FHL income could be reduced by capital allowances, related mortgage or loan interest and pension contributions.
From April 2025, instead of claiming capital allowances on new domestic items (such as furniture, furnishings, and ‘white goods’), the initial cost cannot be claimed but a deduction can be claimed when it is replaced. Note that if writing-down allowances were being claimed before that date, the balances remaining can continue to be claimed until exhausted. The costs of renewing fixtures (such as baths, washbasins, toilets, boilers, etc.) would normally be allowed as building repairs if they are ‘like-for-like’ and not an improvement. The cost of replacing small low-value items (e.g., cutlery, crockery and bed linen) can be claimed when incurred.
Mortgage or loan interest relating to the property can no longer be claimed in full as a deduction from the rental income. Instead, a deduction is given at 20% of the interest from the income tax liability on the rental income. This means that tax relief is given only at the basic rate rather than at 40% or 45% if the owner is liable at those higher rates.
Because the rent is no longer treated as trading income, pension contributions cannot be deducted from it. An owner with other earned income could pay premiums relating to that or would be restricted to the basic contribution of £3,600 (£2,880 net) a year.
From April 2025, FHL properties are no longer treated separately from any other properties owned by the taxpayer. They should be included in the taxpayer’s UK or overseas property business and any FHL losses brought forward can be set against future income from such sources.
Capital gains tax
While FHL rents were previously treated as trading income, qualifying properties were subject to a lower capital gains tax rate under the business asset disposal relief rules when sold or disposed of. In general, this relief ended on 5 April 2025.
Similarly, rollover relief, whereby the gain on the sale of one FHL property could be deferred if another was purchased, is also no longer available.
Inheritance tax
HM Revenue and Customs never accepted that FHL properties were trading businesses for inheritance tax purposes; the properties are instead regarded as investment assets.
Consequently, business property relief was not available, and there is no change here as a result of the end of the FHL regime.
Conclusion
Owners of FHL properties will need to take the above changes into account when preparing their tax returns for the tax year ending 5 April 2026. The capital gains tax liability on the sale or disposal of such properties will now potentially be higher. Similarly, the income tax liabilities for 2025/26, which become payable on 31 January and 31 July 2027, may also be higher than in previous years. Forewarned is forearmed!
Practical tip
Note that ‘anti-forestalling’ rules applied from 6 March 2024 to prevent FHL properties from being disposed of under unconditional contracts in an attempt to retain entitlement to the previous beneficial tax rules.
