The Abolition of the Furnished Holiday Lettings Regime: What Landlords Lost from April 2025
The furnished holiday lettings regime, which for decades taxed qualifying holiday lets almost as if they were a trade, was abolished from 6 April 2025 for income tax and capital gains tax and from 1 April 2025 for corporation tax, under Finance Act 2025. Former FHL landlords lose full finance-cost relief, capital allowances, the trading capital gains tax reliefs and the pension advantage, and instead fall under the ordinary property rules. This article sets out what was lost and what now applies. It is general information, not advice.
What the furnished holiday lettings regime was
For decades the tax system treated a furnished holiday letting as something closer to a trade than to an ordinary rental. A property qualified only if it met strict tests: it had to be furnished, situated in the United Kingdom or the European Economic Area, available for commercial letting to the public for at least 210 days in the tax year and actually let for at least 105 days, with longer-term occupation of more than 31 days by the same person capped so that it did not exceed 155 days in total. A landlord who cleared those hurdles was allowed to compute the profits of the holiday-letting business under rules that borrowed heavily from the treatment of trades, and it is that favourable borrowing, rather than the bricks and mortar, that has now been withdrawn. Understanding what has gone means understanding the four distinct advantages the regime conferred.
The four advantages it gave
First, finance costs such as mortgage interest were deductible in full against the letting profits, without the restriction that applies to ordinary residential landlords. Second, the landlord could claim capital allowances on the furniture, white goods, fixtures and equipment within the property, giving relief on the initial cost of kitting the place out. Third, because the capital gains rules were applied as if the letting were a trade, a disposal could attract Business Asset Disposal Relief, business asset rollover relief and gift holdover relief, reliefs that are simply unavailable to a standard investment property. Fourth, the net profits counted as relevant UK earnings for pension purposes, so they could support tax-relieved pension contributions in a way that ordinary rental income never can. Taken together these four features made the FHL a genuinely different animal, and their removal is the substance of the change.
The abolition dates and the legislation
The regime was abolished by section 25 of, and Schedule 5 to, the Finance Act 2025. For individuals the special rules cease to apply from 6 April 2025 for income tax and capital gains tax purposes, and for companies they cease from 1 April 2025 for corporation tax. The measure was first announced at the Spring Budget on 6 March 2024, confirmed in draft legislation later that year, and then enacted. From those commencement dates a property that was an FHL is taxed under the ordinary property business rules, alongside every other let dwelling, and the separate FHL categorisation, with its distinct reporting, disappears. There is no grandfathering for properties that continue to be let as holiday accommodation; the favourable tax status ends whether or not the letting activity carries on.
Finance costs: the basic-rate tax reducer
The most immediate cash effect for a mortgaged landlord is the loss of full interest relief. Former FHL finance costs now fall under the same restriction that has applied to ordinary residential landlords since it was phased in from 2017. Interest and other finance costs are no longer deducted in arriving at the taxable profit; instead the landlord receives a tax reduction worth the basic rate of 20 per cent, calculated on the lower of the finance costs, the property business profits and the adjusted total income above the personal allowance, with any unrelieved amount carried forward. For a higher-rate taxpayer this is a real increase in tax. To illustrate, and this example is illustrative only, a landlord paying £10,000 of mortgage interest who was previously a 40 per cent taxpayer deducting it in full obtained relief worth £4,000; under the reducer the same interest yields relief of only 20 per cent, or £2,000, an extra £2,000 of tax on identical borrowing.
Replacement of domestic items relief instead of capital allowances
Capital allowances on plant and machinery within a dwelling are no longer available to a former FHL landlord, because the ordinary property rules deny allowances on furniture and equipment inside a residential let. In their place comes replacement of domestic items relief. This gives a deduction when a domestic item provided for the tenant is replaced, covering movable furniture such as sofas, tables and bed frames, furnishings such as curtains, carpets and rugs, household appliances such as fridges, freezers and washing machines, and kitchenware such as crockery and cutlery. The relief is narrower than capital allowances in two important respects: it does not relieve the initial cost of the first item, only its later replacement, and the deduction is limited to the cost of a broadly equivalent replacement, so any element of improvement is stripped out, while any proceeds from selling or part-exchanging the old item reduce the claim. Fixtures such as baths, boilers and fitted units are excluded, as they form part of the building.
The lost capital gains tax reliefs and the anti-forestalling rule
On a sale or gift the trading capital gains reliefs are gone. Business Asset Disposal Relief, which taxed qualifying gains at a reduced rate, no longer applies to a former holiday let, nor does business asset rollover relief that let a gain be deferred against a replacement business asset, nor gift holdover relief for a transfer at undervalue. A disposal now produces a straightforward residential property gain taxed at the ordinary rates for such gains. Anticipating that some owners might try to lock in the old reliefs, the legislation includes an anti-forestalling rule aimed at Business Asset Disposal Relief and applying from 6 March 2024. In broad terms, where an unconditional contract was entered into on or after that date but the asset is not conveyed until on or after the commencement date, the relief is denied unless the arrangement genuinely met the conditions and was not entered into to obtain a tax advantage, with the claim required to confirm as much. The point of the rule is to stop paper contracts being used to preserve a relief that Parliament had decided to withdraw.
Transitional rules and what a former FHL landlord now faces
The transition is not entirely abrupt. Capital allowances already claimed are not clawed back: an existing pool of qualifying expenditure continues, and writing-down allowances can still be taken on that pool over time. Importantly, the event that would normally arise when a business ceases, a balancing charge on the pool, is not triggered merely by the ending of FHL status where the landlord goes on letting the property, so simply falling out of the regime does not crystallise a charge. There is also a short-term measure for a landlord who was part-way through a capital project, allowing relief on that continuing expenditure. Losses need care too: FHL losses could only ever be set against FHL profits, and on abolition they are carried into the ordinary property business and available against its profits. In practice the former FHL landlord now keeps records and is taxed exactly like any other residential landlord, with a higher tax cost on borrowing, a thinner deduction for furnishings and no trading capital gains reliefs on exit. Anyone affected should model the numbers on their own facts before acting.
Common questions
Can I still claim mortgage interest in full against my holiday-let profits? No. From 6 April 2025 finance costs give only a basic-rate tax reduction of 20 per cent rather than a full deduction, exactly as for other residential lets, so higher-rate landlords now pay more on the same borrowing. Do I lose the capital allowances I have already claimed? No. Allowances claimed before abolition are not withdrawn and an existing pool continues to attract writing-down allowances; what stops is the ability to claim allowances on new furniture and equipment, with replacement of domestic items relief taking their place for later replacements only. Will I be taxed as if my holiday-let business has ceased just because the regime ended? Not for capital allowances purposes if you keep letting the property, because the usual cessation balancing charge is suspended where letting continues; but the trading capital gains reliefs, including Business Asset Disposal Relief, no longer apply on a future disposal, and an anti-forestalling rule from 6 March 2024 blocks attempts to preserve them through pre-dated contracts.
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This article is general information only and does not constitute tax advice. Figures and dates are current as at the date of writing; any worked example is illustrative. Always consult a qualified adviser before acting.