With significant changes to the Furnished Holiday Let (FHL) regime coming into effect in April 2025, owners of holiday rental properties face crucial decisions about their tax position and business structure.

What are the key upcoming changes to FHL?

The favourable tax treatment for FHLs is being abolished, meaning they will be treated the same as other rental properties for tax purposes.

Key changes include:

• Loss of capital allowances – FHL owners will no longer be able to claim capital allowances on furniture and fixtures. Instead, relief may be available under the ‘replacement of domestic items’ rule, subject to conditions.
• Treatment of losses – From April 2025, losses will be treated as general rental losses, offsetable against any rental income in the same business.
• Changes to Capital Gains Tax (CGT) – Business Asset Disposal Relief (BADR), which allows CGT at 10 per cent on disposals, will no longer apply after April 2025. The new standard rate will be 24 per cent for residential property sales.
• Rollover and gift holdover reliefs – These will no longer apply to FHL properties from April 2025, significantly impacting tax planning for disposals or family transfers.

Some property owners may benefit from the upcoming changes. Those with a mix of long-term rental and FHL properties, along with unused FHL losses, will be able to offset these losses against other property income starting in 2025/26.

Additionally, the changes will simplify tax reporting by eliminating the need for separate records.

How do the changes affect VAT and expenses?

The current VAT rules are not changing. Holiday accommodation, whether previously qualifying as an FHL or not, will continue to be standard-rated for VAT.

The rule changes do not affect how general expenses can be claimed.

Revenue expenses, such as utilities, repairs, toiletries, and cleaning products, can still be deducted as before.

Finance and mortgage interest costs

After the repeal, the way finance costs are treated will change.

Individual landlords will still be able to obtain relief for mortgage and finance interest costs, but this will be restricted to the basic rate of Income Tax (20 per cent), in line with the existing rules for other residential landlords.

However, companies are not subject to the finance cost restriction rules, making incorporation a potentially attractive option for some landlords.

Should you operate through a limited company?

Many FHL owners are now considering whether incorporating their business would be beneficial.

Operating through a limited company can offer advantages, including:

• Lower tax rates – The main Corporation Tax rate is currently 25 per cent, or 19 per cent for businesses with profits under £50,000. This can be a more favourable option compared to personal tax rates, especially for higher earners who may face rates of up to 45 per cent.
• Flexibility in income extraction – Profits can be retained in the company to defer higher personal tax liabilities.
• Business rates planning – Structuring property ownership through multiple companies can potentially reduce liability for VAT and small business rates relief.

However, incorporation also has its downsides, including increased administrative work such as annual filings and Corporation Tax returns.

Moving an existing property into a limited company may trigger CGT and Stamp Duty Land Tax liabilities, reducing the potential tax benefits.

You should seek professional advice to weigh the benefits and drawbacks of operating through a limited company to understand if incorporation will suit your needs.

What should you do now?

If you own a FHL, it is important to consider your options before the rules change in April 2025:

• Selling the property – If you were planning to sell, doing so before April 2025 could allow you to benefit from the lower 10 per cent CGT rate rather than the new 24 per cent rate.
• Gifting as part of succession planning – If you intend to pass the property to family, it may be worth considering gifting it now while gift holdover relief is still available.
• Reviewing ownership structures – If you own the property jointly, be aware that post-2025, rental income will generally follow ownership shares. Spouses and civil partners are automatically taxed on an equal 50/50 split, unless they file Form 17 with HMRC to declare actual ownership proportions. Now may be the time to reassess whether a partnership, trust, or incorporation better suits your needs.

With the abolition of the FHL regime potentially leading to higher tax liabilities, it’s strongly recommended to seek professional advice to understand the best course of action.

If you would like to discuss how these changes may impact you and explore your options, please get in touch.