Autumn Budget October 2024 outlines the abolition of the Furnished Holiday Lets (FHL) regime, effective from 6 April 2025. This transition explains and clarifies the announcement of FHL abolition announced in the 2024 Spring Budget.
We have discussed the impact of the abolishment of FHL in the different areas, below:
Capital Allowance Changes
Currently, FHL properties benefit from capital allowances on various assets, such as integral features, furnishings, and equipment. From April 2025, Capital allowances on new expenditures will no longer be available, but any claimed for 2024/25, and earlier years will be carried forward, and writing-down allowances will be able to be claimed on that pool.
For clients who are thinking of the longer term, they may want to carry out any improvements before 5 April 2025 to be able to claim capital allowances.
Treatment of Unused Losses
Any FHL losses carried forward at 5 April 2025 can be used against general property business income in future years.
It is worth noting that as the former FHL will be part of the general letting business portfolio from 6 April 2025, a loss arising on any property will be automatically offset against profits arising from the others.
Impact on Reliefs
FHL properties currently enjoy various tax reliefs, including roll-over relief, business asset disposal relief, gift relief, and more. Post-abolition, eligibility for these reliefs will cease. However, the FHL eligibility met before abolishment, and the relief availed during such period will not be affected.
From 6 April 2025, FHL properties will no longer qualify for:
- Business Asset Disposal Relief (BADR), except for disposals by 5 April 2025.
- Roll-over relief and gift relief on new disposals. Gifts made to family before the abolition date can still benefit from business asset treatment.
Loss of these reliefs heightens the importance of pre-2025 disposals or transfers for tax-efficient estate planning.
Any new property purchased after the abolition date would not be eligible for any of the above, which was traditionally allowed.
For business asset disposal relief (BADR), where the FHL conditions are satisfied with a business that ceased before the date of abolition, the relief may continue to apply disposal that occurred within the normal three-year period from 5 April 2025.
Example: Selling the Property,
Product Name | Before 6 April 2025 | After 5 April 2025 |
|---|---|---|
Selling price | £500,000 | £500,000 |
Purchase price | £200,000 | £200,000 |
Gain realised | £300,000 | £300,000 |
CGT Rate | 10% (Qualifies for BADR) | 24% (CGT for higher rate taxpayers) |
Tax Payable | £30,000 | £72,000 |
Impact on Pension Contribution
Income from former FHL businesses will no longer count as "relevant UK earnings" for the purpose of claiming tax relief on pension contribution or for class 2 and voluntary class 3 NIC purpose. This will reduce opportunities for high earners using FHL profits to maximise pension relief.
Anti-Forestalling Rule
An anti-forestalling rule is in place to prevent obtaining tax advantages through unconditional contracts to secure capital gains relief under current FHL rules. This rule applies from 6 March 2024.
The anti-forestalling rule specifies that for contracts made on or after 6 March 2024, with disposals occurring on or after 6 April 2025, Capital Gains Tax reliefs such as rollover relief, gift relief, or Business Asset Disposal Relief will only apply if the claim includes a statement confirming compliance with the conditions outlined in paragraph 14(2) of the draft legislation.
Interest Relief Implications
Interest relief claims will be restricted to the basic 20% rate for former FHL properties after 5 April 2025. Owners looking for long-term efficiency may consider incorporation, especially as companies can still deduct full interest on loans below £2 million annually.
The abolition of FHL affects interest relief claims. Individuals investing in FHL partnerships can currently claim income tax relief for their interest costs. This relief will be abolished for interest arising after 5 April 2025; however, the 20% basic rate relief would be allowed, similar to the residential letting business.
At present, an individual who borrows to invest in a partnership running an FHL (of which they are a partner) can claim Income tax relief for their interest cost. This relief does not apply in the case of Limited Liability Partnerships.
After the abolishment, it is expected that the relief on the interest arising after 5. After 2025, investment in FHL partnerships will be abolished altogether.
Impact on Jointly Owned Properties
For spouses owning rental property jointly, rental income (which was not from FHL) is typically split 50/50 unless otherwise elected. Under FHL, currently, income is split as agreed in a deed of trust and is not deemed to be received equally.
Post-abolition, unless specified otherwise, income will revert to a 50/50 split. To maintain an unequal distribution, filing Form 17 will be necessary.
Incorporating the FHL business
There are several commercial reasons why a person may consider incorporating their lettings business, but three common obstacles often arise:
- Capital Gains Tax (CGT) on disposal
- Stamp Duty Land Tax (SDLT) on transfer
- Securing affordable finance for the company
Capital Gains Tax (CGT)
If HMRC accepts that the lettings activity constitutes a genuine business rather than a passive investment, Incorporation Relief (IR) under Section 162 of the Taxation of Chargeable Gains Act 1992 (TCGA 1992) may apply. This would defer any CGT on the transfer of properties to a company when the consideration is in the form of shares.
The Elisabeth Moyne Ramsay case is the leading authority on whether property lettings qualify as a business for IR purposes. Under IR, the CGT is deferred, as the gain is rolled over by reducing the base cost of the shares. However, CGT will arise upon a future disposal of the shares.
Stamp Duty Land Tax (SDLT)
Incorporating properties typically triggers an SDLT charge, calculated based on their market value. However, SDLT relief may apply if the business operates as a partnership or LLP between connected persons. The relief could reduce the SDLT, potentially to nil, provided all partners are connected.
Anti-avoidance rules are in place to prevent abuse, so SDLT will apply if the partnership was created primarily to obtain SDLT relief on incorporation.
Tax Benefits of Incorporation
A key attraction of incorporation is the lower corporation tax rate (currently 25%), which allows more profits to be reinvested into new properties. However, incorporating may not be tax-effective if:
- The individual relies on rental profits as they arise, or
- The properties will only be held for a short period.
For those with high incomes from other sources, a long-term view of incorporation may still be beneficial. The company could eventually be sold or wound up, subject to CGT on disposal (currently 24%).
An additional benefit is that companies can fully deduct loan interest as an expense, provided annual interest paid does not exceed £2 million.
Practical Considerations
Beyond tax implications, clients must also consider the practical and administrative requirements of running a property letting company. Expert advice is essential to evaluate all legal, financial, and operational factors before proceeding.
Selling FHL Properties
The CGT rate remains at 24% (or 10% for BADR until April 2025). Owners looking to sell should act before 5 April 2025 to benefit from lower rates and reliefs. For partial disposals, ensure compliance with the "whole or part of a business" definition to qualify for BADR.
Conclusion
The abolition of the FHL regime introduces significant changes in tax treatment, financial management, and relief eligibility for property owners. Alongside the stick they are beating furnished holiday let landlords with, they are also using the carrot of a reduction in the rate of CGT applying to higher rate taxpayers disposing of residential property: which falls from 28% to 24% from 6th April 2024.
While the transition provisions aim to mitigate some impacts, property owners must carefully navigate these changes to optimise their tax positions and compliance. Besides the impact discussed above some of the taxes like SDLT, IHT, VAT and Council tax are subject to different rules and will not be directly affected by the abolition of the FHL regime.
Need expert advice on Furnished Holiday Lets (FHL) in the UK?
Contact us today for efficient and hassle-free assistance.
- Bolt’s Court of Appeal Defeat: TOMS and What It Means for Ride-Hailing VAT - 23 June 2026
- Understanding the ‘Mansion Tax’ in Detail: A Clear Guide for Homeowners - 4 January 2026
- The Landmark Shift in Inheritance Tax Relief! - 24 December 2025
