Furnished Holiday Lettings Abolition: How to Advise Landlord Clients on the New Tax Reality

From 6 April 2025, the Furnished Holiday Lettings regime ceased to exist. Properties that previously qualified — self-catering lets available for at least 210 days per year and actually let for at least 105 days — are now taxed as ordinary residential property. For clients who benefited from the FHL rules, the financial impact is material and permanent. The changes affect CGT rates, finance cost deductions, capital allowances, pension contribution eligibility, and in some cases inheritance tax treatment.

This is not an upcoming change to plan for. It has already happened. Clients are now working through their first self-assessment returns under the new rules, and the questions are arriving.

The Four Areas Where FHL Clients Are Feeling the Difference

1. Capital Gains Tax: The Biggest Shock

Under the FHL regime, properties could qualify for Business Asset Disposal Relief (BADR), capping CGT at 10% on disposal. From 6 April 2025, former FHL properties are treated as residential investment property for CGT purposes. The rates now applying on disposal are 18% (basic rate taxpayers) or 24% (higher and additional rate taxpayers) — a significant step up from the previous 10%.

Clients who acquired FHL properties with a long-term disposal strategy built around BADR need to have that strategy revisited. For clients who are in the process of selling or are planning to sell within the next few years, understanding the new CGT exposure is urgent. There is no transitional relief on gains arising after 5 April 2025.

Clients who have already disposed of their FHL property in 2024/25 may be filing their first CGT return under the new rates. Confirm that their return correctly reflects the post-abolition position and does not inadvertently claim BADR that is no longer available.

2. Finance Cost Deductions: The Mortgage Interest Restriction Now Applies

Under the FHL regime, landlords could fully deduct finance costs — including mortgage interest — against their rental income, reducing their taxable profit in the same way as any other business expense. This was one of the most significant tax advantages of the FHL classification, particularly for leveraged property investors.

From April 2025, the residential finance cost restriction applies. Rather than a full deduction, landlords receive a 20% basic rate tax credit on finance costs. For higher-rate taxpayers, this means paying tax on profits that include mortgage interest, with only a 20% credit to offset it. The effective tax cost of holding a mortgaged holiday let has increased substantially for any client paying tax at 40% or 45%.

For clients with significant mortgage debt on former FHL properties, this change alone may have shifted the economics of holding the property. An honest conversation about whether continuing to let is financially rational — given the new tax position — is part of good client service.

3. Capital Allowances: No New Claims
Under the FHL regime, landlords could claim capital allowances on furniture, fixtures, and equipment used in the property. This allowed accelerated tax relief on investment in the property’s contents — a meaningful advantage for holiday lets requiring regular refurbishment to remain competitive.

From April 2025, this is no longer available. Former FHL properties are subject to the same rules as other residential lettings: landlords can only claim the replacement of domestic items relief, which covers the cost of replacing existing items on a like-for-like basis. New items, improvements, and initial furnishing costs are not deductible.

For clients planning property investments or upgrades, this changes the after-tax cost of those investments significantly.

4. Pension Contributions: Loss of Relevant UK Earnings

FHL income was treated as relevant UK earnings for pension contribution purposes, meaning landlords could make pension contributions based on their FHL profits and benefit from full tax relief up to their annual allowance. For property-owning clients using their FHL income to fund retirement savings, this was a valuable route to tax-efficient pension funding.

From April 2025, FHL income no longer counts as relevant UK earnings. Clients who do not have other earned income will find their pension contribution headroom reduced to £3,600 gross per year (the basic limit for those with no relevant earnings) unless they have salary or self-employment income to reference instead.

What Planning Is Still Available Post-Abolition

The abolition does not eliminate all planning options. The following are worth reviewing with clients who hold or have held FHL properties:

• Review the disposal decision
  For clients considering selling, the new CGT exposure needs to be factored into timing decisions. If the property was acquired before the FHL rules changed, rebasing opportunities and annual CGT exempt amounts should be considered alongside the timing of the disposal.

• Consider incorporation
  Some clients with multiple properties may benefit from reviewing whether holding properties through a corporate structure changes the economics — corporation tax is charged at 19–25% and finance costs remain fully deductible for companies. This is not the right answer for everyone, and the SDLT and CGT costs of transferring property to a company are significant, but for clients building a substantial portfolio it deserves analysis.

• Review mortgage strategy
  With finance costs now restricted, the case for reducing mortgage debt on former FHL properties has strengthened. Clients with cash or equity elsewhere may benefit from a debt-reduction strategy.

• Pension planning from other income
  Clients who have lost FHL relevant earnings but have other income sources — self-employment, salary, or professional fees — may still have pension contribution headroom from those sources. A consolidated income and pension review is often overdue for property-owning clients.

• Inheritance tax
  Former FHL properties previously had the potential to qualify for Business Property Relief in some circumstances, given their business-like operation. This analysis has changed significantly post-abolition. Where IHT planning previously included FHL property, it should be reviewed.

BrightTax supports self-assessment returns for landlords and property investors, including the correct treatment of former FHL income

This content may have been developed with the assistance of AI tools. Content is reviewed by a member of the Bright team before publication. Guidance on legislation can be obtained from your industry body.