The abolition of the Furnished Holiday Lettings (FHL) regime

The Furnished Holiday Lettings (FHL) regime came to an end on 6 April 2025, following its abolition as part of the Spring 2024 Budget. The impact will be increased costs for businesses owning FHLs or selling FHLs.

The purpose of the changes is to bring the tax rules on FHLs in line with those for other property businesses.

What are the changes to the FHL regime?

FHLs will no longer benefit from a range of beneficial tax rules. A summary of the changes is as follows:

• Loss of mortgage interest relief: the full amount of finance costs (i.e. mortgage interest) is no longer deductible from FHL profits for higher and additional rate taxpayers.

• Loss of Capital Gains Tax reliefs: upon sale or disposal, Business Asset Disposal Relief (leading to a lower rate of tax on the first £1m of gains) is no longer available. Rollover relief (which allows a capital gain to be deferred by rolling it over against the cost of acquiring a new replacement business asset) will also no longer be available.
• Loss of capital allowances on fixtures and fittings: these can no longer be claimed against the rental income. Previously, the cost of a FHL’s furnishings, fittings and equipment could be applied to reduce the business’ taxable profit. With a FHL, these expenses can be considerable when you consider furniture (sofa, beds, dining table etc.), furnishings (linen, rugs, curtains etc.), electrical goods (kettle, tv, hairdryer etc.), and large electrical appliances (dishwashers, washing machines, tumble dryers etc.).

• Income can no longer be used to make tax-advantaged pension contributions; profits from FHLs no longer count as relevant earnings for pension purposes.
• Joint ownership of a FHL between spouses needs to be recorded in a Form 17 submitted to HMRC along with evidence a FHL is held in unequal shares.

The effect of the above means that income and gains from a FHL will form part of the individual’s UK or overseas property business and be treated in the same way as all other property income and gains, including long-term residential or commercial lets.

With the loss of many of the tax advantages which come with owning a FHL, now is a good time to revisit whether a FHL works for landlords. Despite the loss of Business Asset Disposal Relief and rollover relief, the reduction in capital gains tax to 24% provides an opportunity to make a sale at a reduced rate. A gift to children may still qualify for holdover relief and serve as a good estate planning mechanism to start reducing parents’ inheritance tax exposure.

If you have any questions or concerns about the abolition of the FHL regime or tax generally, please contact private client lawyer Alex Boothman.