Own a furnished holiday let? Changes are coming…

If you’re looking to generate income from your property, the generous furnished holiday lettings (FHLs) tax regime has made FHLs an attractive investment option.

However, this month it was announced that the tax regime would be scrapped altogether in April 2025.

While we await further information on the abolition of the regime, Ian Haynes discusses the changes and FHL owners should prepare.

Furnished holiday lettings (FHLs) are a popular choice for holidaymakers and investors alike.

Owners of furnished holiday lettings (FHLs) have been privy to significant tax benefits over the years. For some, the tax benefits have even been the tipping factor when deciding between investing in an FHL or a buy-to-let property.

However, this year’s Spring Budget revealed that some FHL owners could be left out of pocket due to plans to scrap the respective tax regime.

Off the back of the Chancellor’s announcement, many questions have understandably been raised amongst FHL owners. So, what will the future for furnished holiday lettings look like going forward? And what can FHL owners do to stay ahead?

What is the FHL tax regime?

Currently, if you own and let out your short-term furnished holiday property (instead of letting out your residential property to long-term tenants), you could be eligible for the FHL tax regime.

The regime is a special set of tax rules, ranging from capital allowances and mortgage interest relief to and advantaged pension contributions and Business Asset Disposal Relief (i.e. gains taxed at 10%), making FHLs a great investment opportunity for many.

What are the changes to the FHL tax regime?

However, the recent Spring Budget threw a spanner in the works for those who are benefiting from the generous FHL regime.

As of April 2025, the regime will be scrapped entirely, in the Government’s move to raise tax, whilst cutting other related costs such as National Insurance Contributions. This will help to simplify our tax system as a whole, by removing any discrepancy in tax treatment of rental properties.

What should FHL owners consider?

If you own a furnished holiday let and are benefiting from the regime, the key is not to panic, but to plan.

Stay informed and strategically plan ahead before the changes are implemented, so you’re not caught out later down the line.

In line with the changes, you will need to consider the impact of the following being removed:

Capital allowances – In years gone by, you may have been entitled to claim Capital Allowances on eligible furnishings, fixtures and fittings in your FHL. Once this regime has been wiped, loss of this relief could leave a significant gap in your cash flow. Make sure you’ve accounted for this in your forecasts and looked at any alternative options you may be eligible for.

Mortgage interest relief – As it stands, FHL owners can deduct their mortgage interest payments from their rental income, before calculating their final tax liability. Under the upcoming rules, however, mortgage interest deductions will be replaced by a tax credit equal to 20% of the interest paid. Be mindful that this could result in a higher tax liability.

Capital Gains changes – If you’re planning on selling your property, be aware that the Government will be implementing stricter rules regarding capital gains tax (CGT) relief for FHLs. Currently, you may be eligible for Business Asset Disposal Relief (BADR) on the disposal of your FHL. It is unlikely in the future that your property will meet the qualifying criteria set out by HMRC for BADR, going forward. Without this, you could be facing on a significant tax bill if you’re considering selling your property in the future, albeit that the headline rate of CGT for gains on residential property will reduce from 28% to 24%.

Supporting you with the changes

While we await more detail, having a simple conversation around the changes and what it might mean for your FHL business is a great head start.

Seeking professional advice can not only keeps you informed, but will ensure you understand any changes going forward. Our tax advisors can help with strategic decision making when navigating change, allowing you to mitigate any risks whilst optimising your tax position.