Major Tax Reforms for Furnished Holiday Lettings

From April 2025, significant changes to the UK's tax regime for furnished holiday lettings (FHLs) came into effect, impacting landlords and property owners across the country. These reforms aimed to level the playing field between short-term holiday lets and traditional residential rentals.

Key Changes to the FHL Tax Regime

1. Mortgage Interest Relief Adjustments

Previously, FHL owners could deduct full mortgage interest payments from their rental income, reducing taxable profits. Post-April 2025, this relief was restricted to a 20% basic rate tax credit, aligning with the treatment for standard residential landlords. This change was expected to increase tax liabilities, particularly for higher-rate taxpayers.

2. Capital Allowances Removal

FHL businesses formerly benefited from capital allowances on expenditures for furniture, fixtures, and equipment. After the reforms, these allowances were no longer available. Instead, landlords can now claim relief only for the cost of replacing domestic items, similar to the rules for residential lettings.

3. Capital Gains Tax (CGT) Reliefs Abolished

The favourable CGT treatments for FHLs, including Business Asset Disposal Relief (BADR) and rollover relief, were withdrawn. Consequently, gains from the sale of FHL properties became subject to the standard residential CGT rates, which will be subject to the standard residential CGT rates of 18% for gains falling in basic rate tax and 24% in higher rate tax.

4. Impact on Pension Contributions

Income from FHLs previously qualified as relevant earnings for pension contribution purposes, allowing landlords to make tax-advantaged contributions. Post-reform, FHL income will no longer be considered relevant earnings, potentially limiting pension contribution opportunities for landlords relying on this income stream.

5. Changes to Joint Ownership Income Splitting

Under the previous regime, spouses owning FHL properties jointly could allocate income in proportions different from their ownership shares. From April 2025, income has to be split strictly according to ownership percentages, unless a valid declaration was made to HMRC using Form 17, accompanied by evidence of unequal ownership.

Strategic Considerations for Landlords

These tax reforms may prompt landlords to reassess their investment strategies. Some may consider transitioning their properties to long-term residential lettings to maintain profitability. Others may explore restructuring ownership through limited companies, which could offer different tax advantages.

Seeking Professional Advice

Given the complexity and potential financial implications of these changes, it is advisable for landlords to consult with tax professionals. Tailored advice could help navigate the new landscape, ensuring compliance and optimizing tax positions in light of the reforms.

For personalized guidance on how these changes may affect your property investments, please contact SJC Chartered Accountants.