Furnished holiday lets (FHLs); changes to tax regulations
Following the passing of the 2025 Finance Act, we have the final detail on how furnished holiday lettings (FHLs) are being taxed since 6 April 2025.
What are the key FHL changes confirmed for affected individuals?
FHL changes to income tax
The new regime is designed to bring the taxation of FHLs in line with other types of residential property lettings, which are not treated as trades for tax purposes. Previously, the tax treatment of furnished holiday lets was advantageous in that, where certain conditions were met, the business was treated as a trade.
Where income arises from a non-FHL property jointly owned by spouses or civil partners, the default position is that the parties are taxed on the income in equal shares regardless of the fact that the beneficial ownership of the property may be in different shares. Since 6 April 2025, this rule has also applied to FHLs which previously had income attributed based on actual entitlement.
Going forward, it will be necessary to have a legal deed in place confirming any variation of the beneficial ownership of the property by the spouses or civil partners, and to submit HMRC Form 17 within 60 days of the changes. If the form is not filed with HMRC on time, the income must continue to be reported and taxed in equal shares.
For the period to 5 April 2025, it is still possible to claim a deduction for mortgage interest against FHL income, which ensures that tax relief can be given at the individual’s marginal income tax rate. Since 6 April 2025, this has no longer been the case, with tax relief for mortgage interest instead being given as a reduction of the income tax liability at the basic rate of 20%.
Where the amount on which 20% tax relief is given is less than the amount of mortgage interest paid (for example, because a loss on property income arises), the amount of mortgage interest paid which does not receive relief is carried forward to the following year and is added to the amount of mortgage interest paid for that year.
The tax treatment of qualifying capital expenditure on plant and machinery has also changed since 6 April 2025. Up to 5 April 2025, it was possible to claim capital allowances on this type of expenditure. However, now it is only possible to claim tax relief for the replacement of certain domestic items. Although HMRC has stated that there will be no formal cessation of the FHL business for capital allowances purposes so that there will be no balancing allowances or charges, transitional capital allowances rules will need consideration.
For those individuals who have relied on FHL profits to count as relevant earnings for pension contribution tax relief, this has not been possible since 6 April 2025. The profits now no longer count as relevant earnings for pension contribution tax relief purposes, and the level of any regular contributions may need to be reconsidered.
The way FHL losses were relieved in recent years meant that any unused losses were only available to be carried forward to use against future profits of the same FHL. This meant that the losses were ‘ring-fenced’ and not, for example, available to offset against profits from non-FHL property lettings.
Now, this is no longer be the case. If an individual is treated as carrying on an FHL business in 2024/25 and makes a loss for that year which is unrelieved, and they continue to carry on a ‘corresponding property business’ in 2025/26, the unrelieved loss is treated as if it had been made in that business. In essence, this means losses from one FHL business can be set against profits of another of the individual’s UK property businesses.
FHL changes to capital gains tax
Historically, FHL owners have been able to access various reliefs aimed at reducing or deferring the capital gains tax (CGT) liability on the sale or transfer of properties. Here we explore some significant changes that have been made regarding capital gains tax reliefs now that FHLs will not be treated as a trade as of 6 April 2025.
FHL changes to rollover relief
Previously, it was possible to roll over a capital gain made on a business asset by using the proceeds to invest in a replacement business asset. Effectively, the gain was deferred until the sale of the replacement asset and individuals could take advantage of this relief and invest in FHL businesses. For all new FHL acquisitions since 6 April 2025, it is no longer possible to claim roll-over relief, as they no longer qualify as business assets for the purpose of this relief.
Gift relief
It is no longer possible to claim gift relief on transfers of FHLs since 6 April 2025. This relief was available where an individual gifted an FHL and, where certain conditions were met, the gain realised on the gift could be held over. The gain was taxable when the recipient of the property subsequently disposed of the property.
Business asset disposal relief
Before 6 April 2025, it was, subject to meeting various conditions, possible to claim business asset disposal relief (BADR), previously known as entrepreneurs’ relief, on the sale of an FHL. This relief meant a reduced CGT rate of 10% on gains up to a £1 million lifetime limit, i.e. reduced by any previous claims. As HMRC has stated that the change in rules does not give rise to a formal cessation of trade, unless the FHL business ceased before 6 April 2025, this relief is no longer available on a disposal of assets.
Loans to traders
Where a loan was made to a UK company, sole trade or partnership for the purposes of an ongoing FHL, or the setting up of a FHL, and the loan subsequently became irrecoverable, it was possible to claim a capital loss. This relief is now not available where a loan has been made to a FHL business and the claim is made on or after 6 April 2025, unless the conditions in the legislation are met and the earlier time specified in the claim is before 6 April 2025.
FHL changes to inheritance tax
Where certain conditions are met, business property relief (BPR) for inheritance tax (IHT) purposes provides up to 100% relief for relevant business property. There have been court cases over the years where individuals attempted to claim that their FHL was a trade and therefore qualified for BPR.
Generally, the courts found in favour of HMRC as the BPR conditions had not been met and thus the relief was denied. Following the changes since 6 April 2025, the availability of BPR continues to remain fact-specific and claims are expected to be subject to challenge by HMRC.
FHL changes to value added tax (VAT)
The removal of the specific tax reliefs previously available to FHLs does not impact the VAT treatment of income from such property. Holiday accommodation income will continue to be subject to VAT at the standard rate, if the supplier is required to be registered for VAT.
How Moore Kingston Smith can help
The FHL changes undoubtedly impact long-established plans for many families and businesses. There is no one-size-fits-all answer, so advice should be taken before acting in response to the changes.
If you need advice on how these changes affect you, please get in touch with your usual Moore Kingston Smith contact.
