The UK property market is undergoing significant changes, and one of the most impactful updates is the end of tax breaks for Furnished Holiday Lets (FHLs). This change, effective from April 2025, will drastically alter how property owners manage their holiday rental businesses.
Whether you’re a seasoned landlord or a newcomer to the holiday letting market, understanding these changes is crucial for planning and safeguarding your investments. This comprehensive guide explains everything you need to know about the end of FHL tax benefits, how it impacts property owners, and actionable steps to navigate this transition successfully.
Understanding Furnished Holiday Lets (FHLs)
Furnished Holiday Lets (FHLs) were introduced over 40 years ago to encourage property owners to offer short-term rental accommodations to holidaymakers. These properties benefited from unique tax treatments, making them highly attractive to investors. However, with the rise of platforms like Airbnb and sustained low interest rates, more people entered the holiday letting market, contributing to a shortage of long-term residential properties.
Qualifying as an FHL
To qualify as an FHL, a property had to meet the following criteria:
| Criteria | Requirement |
|---|---|
| Availability | The property had to be available for rent for at least 210 days each year. |
| Actual Lettings | The property must be let out for at least 105 days annually. |
| Short-Term Rentals | Long-term lets (over 31 days) could not exceed 155 days in total. |
For owners with multiple FHL properties, the 105-day rule could be averaged across properties. Additionally, the ‘year of grace’ election allowed properties to maintain FHL status for a year even if they didn’t meet the letting requirements, provided there was an intention to meet them in the future.
Impact of the Changes
Removing FHL tax relief will result in higher tax liabilities for property owners. The most significant change is the loss of benefits such as full mortgage interest deductions, capital allowances, and business rates relief, which previously provided substantial tax savings.
Example: Tax Impact Breakdown
Below is an example illustrating how these changes could impact tax liabilities for a landlord.
| Category | Before the Change (2024/25) | After the Change (2025/26) |
|---|---|---|
| Rental Income | £170,000 | £170,000 |
| Mortgage Interest | £90,000 (fully deductible) | Not deductible (20% tax credit applied) |
| Other Costs | £25,000 | £25,000 |
| Taxable Income | £55,000 | £145,000 |
| Tax Due | £8,486 | £50,153 |
| Final Tax After Credit | £8,486 | £32,153 |
| Increase in Tax Bill | + £23,667 | |
Key Impacts on Property Owners
- Higher Tax Bills – The removal of mortgage interest deductions will significantly increase taxable income.
- Reduced Profitability – Increased tax liabilities could make some holiday lets financially unviable.
- Fewer Investment Incentives – The attractiveness of the holiday letting market may decline as investors reconsider their positions.
- Possible Property Sales – Some landlords may choose to sell or convert their properties to long-term rentals.
Actionable Steps for Property Owners
Given these changes, property owners should consider the following strategies to mitigate financial risks:
1. Review Your Financial Position
Assess how these changes will impact your rental income and overall profitability. Consider consulting with an accountant or tax advisor to understand your tax exposure.
2. Consider Switching to Long-Term Rentals
If the holiday let model becomes less viable, you may want to convert your property into a long-term rental. This would offer more stable rental income and may reduce administrative burdens.
3. Explore Business Structuring Options
Some landlords may benefit from operating through a limited company, where mortgage interest is still deductible against corporate tax.
4. Plan for Increased Tax Liabilities
Ensure you set aside sufficient funds to cover the increased tax burden and avoid unexpected financial shortfalls.
5. Seek Professional Tax Advice
Understanding the nuances of these changes is crucial. Professional guidance can help you navigate this transition smoothly and explore potential savings opportunities.
Conclusion
The abolition of FHL tax relief will significantly impact property owners, potentially making many holiday lets less profitable. Planning ahead is essential. Reviewing your finances, considering alternative rental strategies, and preparing for increased tax liabilities can help safeguard your investments.
If you’re unsure how these changes will affect you, seeking professional advice is highly recommended. Planning now can help you save money and avoid financial surprises when the new rules take effect in 2025.
For tailored advice on how to manage these changes, contact Vectris Accountants today.
