Furnished Holiday Let Tax Changes from April 2025: Key Updates

• Key FHL Tax Changes in 2025
• Potential Impact on FHL Owners
• What This Means Now
• Final Thoughts on FHL Tax Changes 2025

Introduction

The tax treatment of Furnished Holiday Lets (FHLs) changed significantly from April 2025. The government abolished the favourable FHL tax treatment, aligning it with the rules for other residential rental properties. The abolition took effect on 6 April 2025 for income tax and capital gains tax, and on 1 April 2025 for corporation tax. Announced in the 2024 Spring Budget, this change raised tax bills and removed key reliefs for FHL owners.

Historically, FHLs enjoyed a more favourable tax regime than other residential properties. These properties enjoyed tax perks like mortgage interest deductions, capital allowances, and reliefs such as gift holdover and rollover relief.

The rules now remove these benefits and tax FHL income like any other residential property business income.

This blog explains the FHL tax changes, who they affected, and what they mean now.

Key Takeaways:

• Mortgage Interest Relief: Since April 2025, higher-rate and additional-rate taxpayers only receive a 20% tax credit on mortgage interest (rising to 22% from 2027/28), reducing the tax relief they previously enjoyed.
• Capital Gains Tax (CGT): FHL owners lost the ability to claim Business Asset Disposal Relief (BADR) and rollover relief on FHL disposals. CGT on sales of FHL properties is now charged at the residential property rates, which are 18% within your basic rate band and 24% above it. BADR, which now gives an 18% rate, can still apply to a disposal made within three years of an FHL business that actually ceased before 6 April 2025.
• Capital Allowances: Since April 2025, relief for the replacement of domestic items (e.g., furniture, white goods) is a revenue deduction rather than a capital allowance. Existing capital allowance pools continue, but new expenditure is subject to the new rules.
• Pension Contributions: FHL profits are no longer considered relevant earnings for pension contribution purposes, affecting how FHL owners calculate their maximum pension relief.
• Joint Ownership: Spouses and civil partners who own a former FHL in unequal shares need to submit Form 17 to HMRC to be taxed on their actual shares.

What is a Furnished Holiday Let (FHL)?

Under the former regime, a Furnished Holiday Let was a property that was available for short-term rental for a minimum of 210 days per year and was actually let out for at least 105 days. These properties had to be furnished to a standard suitable for short-term accommodation and could not be used as a long-term let for periods exceeding 31 days.

HMRC historically treated FHLs as a trade for tax purposes, giving owners several advantages over traditional residential property landlords. The main benefit was access to broader tax reliefs and deductions, similar to those available to traditional business owners.

Former Tax Benefits for FHLs

Before the 2025 changes, owners of Furnished Holiday Lets enjoyed several key tax benefits that set them apart from other property investors. These included:

1. Mortgage Interest Deduction

FHL owners could deduct mortgage interest expenses from their rental income, reducing their overall tax liability. For higher-rate and additional-rate taxpayers, this provided significant tax savings.

2. Capital Allowances

FHL owners could claim capital allowances on expenses like furniture, white goods, and certain property improvements. This allowed many FHL owners to reduce their taxable income through the depreciation of their assets.

3. Capital Gains Tax Reliefs

FHL owners were eligible for Business Asset Disposal Relief (BADR), which allowed them to sell FHL properties and pay a reduced rate of CGT on the first £1 million of lifetime gains. FHL owners could also defer CGT by reinvesting sale proceeds into another qualifying property using rollover relief.

4. Pension Contributions

HMRC historically treated income from an FHL business as relevant earnings, allowing owners to make larger pension contributions. This could result in significant tax savings on retirement savings.

The government implemented new rules in April 2025 that significantly changed how FHL income and gains are taxed. These changes include:

1. Mortgage Interest Relief

From April 2025, mortgage interest for FHL properties is no longer deducted as a business expense. Instead, it is treated as a 20% tax credit for higher-rate and additional-rate taxpayers (rising to 22% from 2027/28), which is a significant reduction compared with the previous relief of 40% and 45%, respectively.

2. Capital Gains Tax

Previously, FHL owners could access Business Asset Disposal Relief (BADR), allowing them to pay a reduced CGT rate on up to £1 million of lifetime gains. From April 2025, FHL properties are subject to the residential property CGT rates (18% within your basic rate band and 24% above it), and owners lost access to BADR and rollover relief for FHL disposals. BADR, which now gives an 18% rate, can still apply to a disposal made within three years of an FHL business that actually ceased before 6 April 2025. This means higher taxes on future sales of FHL properties.

3. Capital Allowances

The ability to claim capital allowances was also restricted. From April 2025, owners can no longer claim capital allowances for improvements to FHL properties. Relief for replacing domestic items, such as furniture or white goods, is given as a revenue deduction under Replacement of Domestic Items Relief rather than as a capital allowance. Existing capital allowance pools are carried forward, but any new expenditure is subject to the new property business rules.

4. Pension Contributions

From April 2025, FHL profits are no longer considered relevant earnings for pension contributions. This means FHL owners can no longer use their rental profits to calculate the maximum amount they can contribute to pensions, potentially reducing their pension savings opportunities.

5. Joint Ownership Changes

The 50:50 rule for income from jointly owned property applies to spouses and civil partners living together. Spouses and civil partners who own a former FHL in unequal shares need a Form 17 declaration, sent to HMRC within 60 days, to be taxed on their actual shares. Without it, the income is split 50:50 for tax purposes. Other joint owners are taxed on their actual shares.

Potential Impact on FHL Owners

The changes to FHL tax rules primarily affect owners of furnished holiday lets who relied on the former tax advantages. The

reduction in mortgage interest relief and the loss of Business Asset Disposal Relief are likely to be the most significant changes for owners looking to sell their properties or reduce their tax bills.

The increased CGT rates mean higher taxes for those selling FHL properties. Likewise, the restriction on capital allowances reduces the ability to offset expenses related to property improvements, making it more difficult for owners to manage their tax burden.

For FHL owners planning for retirement, the loss of pension contribution relief may mean that alternative strategies are needed to maximise retirement savings.

What This Means Now

The changes have taken effect, so the opportunities to act before April 2025 are no longer available.

Consider Alternative Pension Strategies Since HMRC no longer treats FHL profits as relevant earnings for pension purposes, you may want to explore other pension contribution options or consider tax-efficient savings plans to prepare for retirement.

Final Thoughts on FHL Tax Changes 2025

The tax changes for Furnished Holiday Lets (FHLs) that took effect in April 2025 represent a major shift for property owners. These reforms, which include the loss of key benefits like Business Asset Disposal Relief (BADR) and mortgage interest deductions, significantly affect the financial landscape for FHL owners.

If you’re an FHL owner wondering how the rules apply to you now, consider reviewing how your property income and gains are taxed and revising your retirement plans.

Get Expert Advice from ASWATAX

Don’t face these changes alone. At ASWATAX, we specialise in helping property owners like you adapt to FHL tax reforms. Our experienced team offers tailored advice to help you reduce tax liabilities and optimise your financial strategy.

Contact ASWATAX today to schedule a consultation and make sure you understand the impact of the FHL tax changes.