Tax changes for Furnished Holiday Lets property owners

The current tax benefits for the letting of properties as short-term holiday lets (known as Furnished Holiday Lets – FHL) is to be abolished from April 2025. The changes will take effect on or after 6 April 2025 for Income Tax and for Capital Gains Tax and from 1 April 2025 for Corporation Tax and for Corporation Tax on chargeable gains.

The changes will remove the tax advantages that current FHL landlords have received over other property businesses in four key areas by:

• applying the finance cost restriction rules so that loan interest will be restricted to basic rate for Income Tax;
• removing capital allowances rules for new expenditure and allowing the replacement of domestic items relief;
• withdrawing access to reliefs from taxes on chargeable gains for trading business assets;
• no longer including this income within relevant UK earnings when calculating maximum pension relief available.

After the repeal, properties previously classified as FHLs will be integrated into the individual's UK or overseas property business and will be governed by the same rules as non-FHL property businesses.

An anti-forestalling rule also prevents individuals from gaining a tax advantage by entering into unconditional contracts to claim capital gains relief under the current FHL rules. This provision applies from 6 March 2024, the date the measure was first announced.

The removal of the special tax regime for holiday lets is expected to have a significant impact on many involved in the short-term holiday rental market in the UK.