The future of furnished holiday lets

The government has announced the abolition of the Furnished Holiday Lets (FHL) tax regime from April 2025. This means that short-term holiday rentals will be treated the same as long-term residential lets for tax purposes.

Key impacts include the loss of full interest relief (replaced by a 20% tax credit), the removal of capital gains tax reliefs like Business Asset Disposal Relief, and the inability to count rental income as relevant earnings for pension contributions.

Loss of mortgage interest relief

Currently, FHL landlords can deduct the full cost of their mortgage interest from their rental income before calculating tax. From April 2025, this will be restricted to a basic rate (20%) tax reduction, bringing FHLs in line with standard buy-to-let properties. For higher-rate taxpayers with significant borrowing, this will result in a substantial increase in their tax liability.

Capital Gains Tax implications

The abolition also removes access to Business Asset Disposal Relief (BADR). Under the current rules, selling a qualifying FHL could benefit from a 10% CGT rate. From April 2025, the sale of these properties will be subject to the standard residential property CGT rates (18% for basic rate taxpayers and 24% for higher rate taxpayers). Landlords considering selling their holiday lets may need to act before the deadline to secure the lower rate.

Pension contributions and capital allowances

FHL income currently counts as 'relevant earnings' for the purpose of making tax-relieved pension contributions. This advantage will be lost. Furthermore, the ability to claim capital allowances on furniture, white goods, and fixtures within the property will be replaced by the more restrictive 'replacement of domestic items relief'. Landlords must review their financial models to understand the full impact of these changes.