Furnished holiday letting – changes to tax

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From the 6 April 2025, the tax treatment of Furnished Holiday Lets (FHL) changed. Income from these properties is now treated the same as other residential lets.

This is expected to impact 127,000 holiday let owners across the country.

What has changed for FHLs?  

Furnished holiday lets are now part of an individual or company’s UK or overseas property business. The property business will include the amalgamation of all profits and losses of all the properties in that business.

• Income from an FHL business will now be treated as investment income rather than trading income.
• Significantly, the income from FHLs will be taxed on the owner of the property rather than the individual managing the business.
• The income will not be counted as relevant earnings for the payment of pension contributions.
• If an FHL business had losses on 5 April 2025, these losses will be pooled with other residential losses, if relevant. If the other residential property had no losses, the losses will be set against the first available profits of the ‘property business’, which will include all residential lets.
• Capital allowances are no longer available on purchases of capital assets of the FHL. If there was a balance on the capital allowance pool on 5 April 2025, the writing down allowances will continue until the pool is fully written down.
• Purchase of new assets are eligible for replacement of domestic items relief. This allows for a deduction for the replacement (not initial purchase) of certain domestic items.
• The tax treatment of finance costs incurred by the holiday let property is now restricted to the basic rate of tax, meaning most owners of FHLs will pay more income tax.

Selling an FHL

Individuals looking to sell furnished holiday lets will need to consider Capital Gains Tax (CGT).  FHLs will now be treated as non-business assets and certain reliefs will no longer be available. These include Rollover Relief and Business Asset Disposal Relief.

The gain for individuals (after exemptions) on FHL disposal, will attract CGT at 18% for basic rate taxpayers or 24% for higher rate taxpayers. To assess your income level, the value of the gain is taken into account on an accumulated income.

If there is tax payable on the gain, the gain will need to be reported to HMRC within 60 days, and the tax is due at the same time. Late filling attracts a penalty of 5% of the tax due plus interest.

For companies, corporation tax will be payable on the gain and the company is not required to report the gain within 60 days.

Inheritance Tax on FHLs

A standalone FHL will not qualify for Business Property Relief and will therefore be fully chargeable to Inheritance Tax (IHT). This has been the subject of numerous tax tribunals in recent years, with HMRC winning the vast majority of cases.

FHLs run as part of a larger business, such as hospitality or farming, may qualify for full IHT relief. This is a particularly complex area and requires specialist advice.