Furnished Holiday Lets: What You Need to Know About Their Changing Tax Treatment

From 5 April 2025, the tax treatment of Furnished Holiday Lets (FHLs) in the UK will undergo a significant change. FHLs will no longer be classified as business income, for Personal Tax purposes, and instead will be treated as rental income. This shift impacts the tax benefits FHL owners currently enjoy, including the ability to claim mortgage interest as an allowable expense. If you're an FHL owner, understanding these changes is essential to prepare for the upcoming tax implications.

What Are Furnished Holiday Lets?

Before we discuss the changes, let’s quickly recap what qualifies as a Furnished Holiday Let. An FHL is a property that is rented out on a short-term basis (typically between 7 and 31 days) and is furnished to a high standard. To qualify as an FHL under current rules, the property must be available for letting for at least 210 days a year and actually let for at least 105 days. These conditions are expected to remain, but the core change is in how the income from FHLs will be treated for tax purposes from 5 April 2025.

The Core Change: FHLs to Be Treated as Rental Income

Currently, income from an FHL is treated as business income, which allows property owners to access certain tax advantages usually reserved for businesses. These include:

• Capital allowances on furniture, fixtures, and equipment.

• Offsetting losses from other businesses against FHL income.

• Business Asset Disposal Relief (formerly Entrepreneurs’ Relief), which offers a reduced Capital Gains Tax (CGT) rate of 10% on the first £1 million of gains when selling the property.

However, starting from 5 April 2025, FHLs will no longer be classified as a business, and income will be taxed as rental income. This means FHL owners will lose access to these business-related tax reliefs, with significant implications for tax planning.

Key Implications of FHL's Reclassification From Business to Rental Income

1. Loss of Key Tax Reliefs

The most immediate impact of this change is the loss of the tax advantages associated with treating FHL income as business income. From April 2025, FHL owners will no longer be able to claim:

• Capital allowances on furnishings and fixtures used in the property.

• Business Asset Disposal Relief for reduced CGT rates on the sale of the property.

• Losses from FHLs will no longer be able to offset other business or personal income.

2. Mortgage Interest No Longer A Tax Deductible Expense

Under the current system, FHL owners can deduct mortgage interest as an allowable expense, just as they would for any other business expense. However, once FHLs are classified as rental income properties from 5 April 2025, the rules will change. Mortgage interest will no longer be deductible as an allowable expense for FHLs. Instead finance costs such as mortgage interest will be subject to the restricted tax relief that applies to traditional rental properties. This means FHL owners will only be able to claim relief at the basic rate of income tax (20%) rather than deducting the full amount of mortgage interest from their FHL rental income. This change will increase the tax burden on many FHL owners and is an important consideration when planning for the future of FHL properties under the new tax regime. For FHL owners with significant mortgage interest costs, this could represent a substantial increase in taxable income, and therefore higher Personal Tax liabilities.

3. Impact on Capital Gains Tax (CGT)

Historically, FHL owners have benefited from Business Asset Disposal Relief, which allows them to pay a reduced CGT rate of 10% on gains from the sale of the property, up to a £1 million lifetime limit. However, under the new rules, FHL owners will no longer be eligible for this relief with their property being classified as rental income rather than a trading business income.

This means that when you sell your FHL property after 5 April 2025, the sale will likely be subject to the standard CGT rates of 18% or 24% (depending on the gain and your income level), rather than the 10% rate. This could result in a higher tax bill upon disposal, especially if the property has appreciated significantly in value.

4. Loss of Business Rates Option

Currently, FHL owners have the option to pay business rates instead of council tax, which can sometimes be more favourable. To qualify for business rates, the property must be available for letting for at least 140 days per year.

From 5 April 2025, as FHLs will be classified as rental properties, they will lose the eligibility to pay business rates and will be subject to the same council tax rules as standard residential properties. This could result in higher ongoing tax costs for property owners, particularly for higher-value properties where business rates may have been lower than council tax.

Conclusion

The tax changes coming into effect on 5 April 2025 will fundamentally alter how Furnished Holiday Lets are taxed. The shift from business income to rental income will result in the loss of mortgage interest deductions, along with other key tax reliefs such as Business Asset Disposal Relief and capital allowances. For FHL owners, these changes can result in higher taxable income and potentially higher taxes for both Income Tax and Capital Gains Tax.

If you wish to discuss any of the above changes in further detail, along with how they affect your current tax position, then please call Will on 01803 906 836.