Important Changes to Furnished Holiday Lettings (FHL) Tax Rules – April 2025

As your trusted partner in holiday property management here at Stewarts Estates, we want to ensure you're fully informed and prepared for important upcoming tax legislation changes affecting Furnished Holiday Lettings (FHLs).

What's Changing?

From 6 April 2025 (or 1 April 2025 for companies), the UK government will repeal specific tax relief previously enjoyed by Furnished Holiday Lettings. This change means holiday lettings will be treated the same as standard residential lettings for Income Tax and Corporation Tax purposes.

Key Changes to Note:

Mortgage Interest Relief: Previously, individuals could fully deduct mortgage interest from their rental income. After April 2025, mortgage interest will receive relief only at the basic rate of Income Tax (currently 20%). This aligns FHL taxation with regular buy-to-let properties and may increase the tax liability for higher-rate taxpayers.
Capital Allowances: Capital allowances on furniture, furnishings, and fixtures will no longer be available. Instead, you'll be able to claim the Replacement of Domestic Items Relief, allowing deductions for the cost of replacing items on a like-for-like basis.
Expenses: General running costs and expenses such as utilities, repairs, cleaning, and consumables remain fully deductible.
Losses: Losses from FHL operations can still be carried forward but will now be treated as standard property business losses. These can offset future property rental income.

Example of Mortgage Interest Relief Change:

Let's illustrate clearly with an example:

Annual rental income: £20,000
Mortgage interest: £6,000
Other expenses: £4,000
Higher-rate taxpayer (40%)

Before April 2025:
Taxable profit was £10,000, leading to a tax bill of £4,000.

After April 2025:
Taxable profit rises to £16,000. Tax calculated at 40% (£6,400), with a mortgage interest relief at 20% (£1,200) results in a tax bill of £5,200—an increase of £1,200.

What Doesn't Change?

VAT Rules: VAT rules for holiday accommodation remain unchanged.
Council Tax and Business Rates: These also remain unaffected by the repeal.

Actions You Can Take:

Review your finances: Speak with your accountant or financial adviser to understand how these changes may affect your tax liability.
Planning ahead: Consider your options, including possible adjustments to how your property is financed or operated, to minimise the impact.