Furnished Holiday Letting (FHL) Regime Abolished from April 2025: What Landlords Need to Know

From April 2025, the UK government will officially abolish the Furnished Holiday Letting (FHL) regime, a longstanding set of rules offering favourable tax treatment for landlords letting short-term, furnished accommodation.

This change affects individuals, partnerships, companies, and trusts that rent out qualifying holiday accommodation—whether in the UK or the European Economic Area (EEA).

While the transition may seem relatively straightforward on the surface, the underlying tax implications are wide-reaching and potentially costly—especially for higher-rate taxpayers, those with mortgages, or landlords who rely on FHL profits for pension contributions.

Let’s break down what’s changing, what’s not, and what you should do now to prepare.

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🧾 What Was the FHL Regime?

The FHL regime offered landlords special tax advantages if their properties met certain availability and occupancy tests. These advantages included:

• Full mortgage interest deductibility
• Access to capital allowances
• Entitlement to CGT reliefs (e.g., Business Asset Disposal Relief)
• Profits counting as relevant earnings for pension contributions
• Flexible income splitting between spouses

These benefits made the FHL regime more like a “trading business” than an investment property for tax purposes.

But from April 2025, this regime disappears entirely.

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🕰️ When Does the Change Happen?

• For individuals: 6 April 2025 (start of the 2025/26 tax year)
• For companies: 1 April 2025
• For accounting periods that straddle these dates, two distinct tax periods will be created for transition purposes.

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🔄 What Will Change?

Here’s a summary of the major changes and what they mean for landlords:

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1. Mortgage Interest Relief Slashed

🔺 Before April 2025
You could deduct 100% of your finance (mortgage) costs from FHL income.

🔻 From April 2025
You’ll only get a 20% tax credit on your mortgage interest—just like standard buy-to-let properties.

💡 Watch out: This could push you into a higher tax bracket, especially if you’re a basic-rate taxpayer near the threshold or if you lose part of your personal allowance due to higher adjusted income.

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2. Loss of CGT Reliefs

🔺 Before:
FHLs qualified for Business Asset Disposal Relief, rollover relief, and gift relief. You could roll over gains into new FHL properties, defer gains, or reduce them on business disposal.

🔻 After:
New gains will not qualify for these reliefs. However, past qualifying gains and claims made before April 2025 are protected. You can still claim BADR if you dispose of a qualifying FHL within 3 years of ceasing the business.

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3. Loss of Pension Contribution Benefits

🔺 FHL profits counted as “relevant earnings” to support personal pension contributions over £3,600.

🔻 From April 2025, FHL profits won’t count. You’ll need income from employment or a trade to make higher contributions.

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4. End of Capital Allowances

🔺 You could claim capital allowances on furnishing and equipping FHLs.

🔻 From April 2025, no more capital allowances for newly purchased fixtures or fittings.

✅ However, you can claim relief through:

• Replacement of Domestic Items Relief (RDIR) for furniture and appliances
• Repairs and maintenance deductions

💡 Existing capital allowance pools will continue, and can still be written down.

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5. Loss of Flexible Income Splitting Between Spouses

🔺 FHLs allowed flexible profit sharing between spouses or civil partners.

🔻 From April 2025, jointly owned properties default to 50:50 split unless a Form 17 is filed and beneficial ownership is different.

⚠️ Changing ownership to adjust profit share could trigger:

• Capital Gains Tax (if gifting to anyone other than a spouse)
• Stamp Duty Land Tax (SDLT) if a mortgage is involved—even between spouses.

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6. Losses Now Pooled with Other Property Losses

Previously, FHL losses were ring-fenced—they couldn’t be offset against profits from standard rental properties.

From April 2025:

• UK FHL losses will become part of your UK property business losses.
• EEA FHL losses will become overseas property losses.

✅ This may benefit landlords with profitable FHLs and losses elsewhere or vice versa.

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📌 What Doesn’t Change?

Despite these sweeping tax changes, some things stay the same:

✅ 1. VAT Treatment

Holiday lets will still be treated as VAT-able supplies, unlike standard long-term residential lets. Businesses exceeding the £90,000 VAT threshold must register.

✅ 2. Inheritance Tax (IHT) Rules

FHL status never guaranteed Business Property Relief (BPR) for IHT. It always depended on offering hotel-like services (cleaning, meals, etc.). This remains unchanged—you’ll still need to prove a trading business, not just investment activity.

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💣 Hidden Traps for the Unaware

Here are a few less obvious consequences to be wary of:

🧮 Mortgage Interest “Trap” for Basic Rate Taxpayers

Even if you’re currently a basic-rate taxpayer, disallowed interest can push your adjusted net income above key thresholds:

• £50,270: Higher rate tax begins
• £100,000+: Personal allowance starts to taper
• £60,000+ with children: High Income Child Benefit Charge applies

💍 Form 17 and Joint Ownership Confusion

Jointly owned properties will default to 50:50 profit split unless you take steps to legally change ownership and file a Form 17 with HMRC.

Don’t assume you can just “decide” to change the split without creating unintended tax charges.

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🧮 Case Study: Tax Impact on a Typical Landlord

Sarah owns a holiday cottage in Cornwall, generating £28,000 annual profit, with £9,000 in mortgage interest.

✅ Under FHL rules (pre-April 2025):

• £28,000 income
• Minus £9,000 interest
• Taxed on £19,000 profit

If Sarah is a higher-rate taxpayer, she pays 40% tax = £7,600

❌ Post-April 2025 (ordinary let treatment):

• £28,000 income
• No deduction for £9,000 interest
• Taxed on full £28,000
• Receives 20% tax credit on £9,000 = £1,800

Tax = 40% of £28,000 = £11,200
Minus £1,800 credit = £9,400
🔺 Tax increase = £1,800 (24% more)

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👨‍💼 What Should Landlords Do Now?

✅ 1. Review Ownership Structures

If you jointly own property, especially with a spouse, assess whether a Form 17 and a declaration of trust is necessary.

✅ 2. Check Pension Contributions

If you’re using FHL profits to justify high personal pension contributions, you’ll need a new source of ‘relevant earnings’ from April 2025.

✅ 3. Reassess Your Mortgage Strategy

Forecast your post-2025 cash flows if mortgage interest relief is limited. Consider overpayments or refinancing if necessary.

✅ 4. Consider Incorporation (Carefully!)

For higher-rate taxpayers with significant mortgage costs, incorporating into a limited company may now offer better tax outcomes. But it comes with:

• CGT and SDLT implications
• Ongoing compliance costs
• Loss of certain allowances

This route must be professionally advised.

✅ 5. Seek Advice on Existing Losses and Allowances

Maximise any capital allowance claims before April 2025, and review whether old losses can now be used more efficiently under the new rules.

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📋 Summary Table

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 How Merranti Accounting Can Help

If you’re a landlord currently operating under the FHL regime—or considering making changes before April 2025—this is the time to act.

Our tax team can:

✅ Model your post-FHL tax position
✅ Assess whether incorporation or restructuring is worthwhile
✅ Help with Form 17, CGT planning, and declarations of trust
✅ Maximise any available reliefs before the window closes
✅ Ensure your records are ready for Making Tax Digital (MTD)