The UK government is abolishing the Furnished Holiday Lettings (FHL) tax regime from April 2025. This means that short-term holiday lets will be taxed in the same way as traditional rental properties, removing some of the financial perks that holiday let owners currently enjoy.
We have summarised the breakdown of the changes below.
- Higher Tax on Profits (Less Mortgage Interest Relief)
What’s Changing?
Right now, holiday let landlords can deduct 100% of their mortgage interest from their rental income before calculating tax. This helps reduce tax bills significantly.
From April 2025, this will no longer be allowed. Instead, holiday let owners will only get a basic rate (20%) tax credit on their mortgage interest – the same rule that applies to regular landlords.
Example:
Before April 2025: If you earned £20,000 from your holiday let and had £5,000 in mortgage interest, you’d only be taxed on £15,000.
After April 2025: You’ll be taxed on the full £20,000, but you’ll get a tax credit worth 20% of the £5,000 mortgage interest (£1,000).
Impact:
If you’re a higher-rate taxpayer (40% or 45%), this change will significantly increase your tax bill, as you’ll no longer be able to fully offset mortgage interest.
- No More Tax Breaks on Property Improvements
What’s Changing?
Currently, holiday let owners can claim capital allowances on furniture, fittings, and equipment (e.g., beds, sofas, kitchen appliances) used in the rental.
From April 2025, this will no longer be allowed. Instead, you’ll only be able to claim Replacement of Domestic Items Relief, which means:
- You can only get tax relief when replacing items, not on the initial cost of furnishing a property.
- Some expenses (e.g., new fitted kitchens, carpets) may no longer qualify for tax relief at all.
Impact:
If you need to refurbish or upgrade your holiday let, consider doing it before April 2025 to claim tax relief while it’s still available.
- Higher Tax When Selling Your Holiday Let (Capital Gains Tax Hike)
What’s Changing?
When you sell a qualifying holiday let before April 2025, you can claim Business Asset Disposal Relief, meaning you pay just 10% Capital Gains Tax (CGT) on profits from the sale.
From April 2025:
You will no longer qualify for this relief.
Instead, you’ll pay the normal residential property CGT rates:
- 18% for basic rate taxpayers
- 24% for higher-rate taxpayers
Example:
Before April 2025: If you made a £100,000 profit selling your holiday let, you’d pay £10,000 in CGT.
After April 2025: You’d pay £18,000 or £24,000, depending on your tax rate.
Impact:
If you were considering selling your holiday let, doing so before April 2025 could save you thousands in tax.
- Holiday Let Profits Will No Longer Count as Earnings for Pensions
What’s Changing?
Right now, income from furnished holiday lets counts as “relevant earnings”, meaning you can use it to qualify for tax-advantaged pension contributions.
From April 2025:
Holiday let profits will be treated like normal rental income, which does NOT count towards pension contribution limits.
Impact:
If you rely on your holiday let income to maximise your pension contributions, you may need to adjust your retirement savings strategy.
- Stricter Rules on Splitting Profits Between Owners
What’s Changing?
Currently, joint owners of a holiday let can split profits in any proportion, regardless of ownership percentage. This is useful for tax planning, as couples can allocate more income to the lower-taxed partner.
From April 2025:
Profits must be split strictly according to ownership percentages.
Impact:
If you previously shifted profits to a lower-taxed spouse, this will no longer be possible, potentially increasing your overall household tax bill.
What Can Holiday Let Owners Do Now?
- Consider Switching to Long-Term Rentals
Since holiday lets and long-term rentals will soon have the same tax treatment, some owners might prefer long-term tenants to ensure more stable income.
- Review Ownership Structures
If you own a holiday let as an individual, it might be worth looking into alternative structures (e.g., a company) where different tax rules apply.
- Plan for a Sale Before April 2025
If you were thinking of selling your holiday let, doing it before April 2025 could help you avoid higher CGT rates.
- Make Improvements Before the Tax Breaks End
If you need to buy new furniture or refurbish your property, doing it before April 2025 could allow you to claim tax relief before the rules change.
| Change | Before April 2025 | After April 2025 |
| Mortgage Interest | Fully deductible | Only 20% tax credit |
| Furniture & Equipment Tax Relief | Allowed | Not allowed |
| Selling CGT Rates | 10% (if qualified) | 18%-24% |
| Pension Contribution Eligibility | Counts as earnings | Does not count |
| Profit Splitting for Joint Owners | Flexible | Fixed by ownership % |
The government’s decision to scrap the FHL tax regime will increase tax costs for holiday let owners, making short-term letting less financially attractive. These changes could have a significant financial impact, so now is the time to review your options and take action.
If you own a holiday let, our team at Outsourced ACC offers a free consultation to help you determine the best approach for your situation.