The End of Furnished Holiday Lettings Tax Breaks: What Property Investors Need to Know

In the Spring Budget 2024, the UK government announced that the Furnished Holiday Lettings (FHL) tax regime would be abolished by April 2025.

For landlords who own properties let as holiday homes, this change marks the end of an era. So, what exactly is changing, and how does it affect those in the short-term rental market?

What Was the FHL Regime?

The Furnished Holiday Lettings (FHL) scheme was designed to incentivise the supply of short-term accommodation for tourists. To qualify for the tax breaks, landlords needed to ensure their property met certain criteria:

- Furnished and let on a commercial basis (available for short-term rentals)

- Available to let for at least 210 days per year

- Actually let for at least 105 days per year (excludes long-term tenants)

For landlords who met these requirements, the regime provided generous tax reliefs not available to standard residential landlords.

What’s Changing this April?

The government has decided to abolish the FHL regime by April 2025, meaning landlords will no longer benefit from the above tax advantages. Key changes include:

- Loss of Full Mortgage Interest Deduction  

  From 2025 onwards, landlords will no longer be able to offset 100% of their mortgage interest costs against their rental income. Instead, this will be replaced by the standard 20% tax credit, reducing tax efficiency.

- End of Capital Allowances  

  The ability to claim capital allowances for items like furnishings, fittings, and equipment will be phased out, impacting the profitability of some holiday let properties.

- CGT Treatment  

  The reduced Business Asset Disposal Relief (10% CGT rate) for FHL properties will no longer apply. Any capital gains on the sale of FHL properties will be subject to higher residential CGT rates.

- No More Pension Contributions  

  FHL income will no longer count as relevant earnings, meaning landlords will not be able to make higher pension contributions based on income from these properties.

Why Is This Happening?

The government’s decision to remove the FHL tax regime reflects growing concerns about the impact of short-term lets on local housing markets. In popular tourist areas, such as Cornwall, the Lake District, and North Wales, second homes and holiday lets have driven up property prices and reduced availability for local residents. By ending the tax breaks for FHLs, the government hopes to:

- Encourage more long-term rentals, which could help alleviate housing shortages in key areas.

- Level the playing field between residential and holiday let landlords.

- Ensure that the tax system is fairer and doesn’t disproportionately favour one group of property investors.

What Does This Mean for FHL Landlords and Investors?

Landlords who currently operate holiday lets under the FHL regime will need to reassess their strategies in light of the changes:

1. Reduced Profitability  

  Many landlords will find that the tax changes will significantly reduce their profit margins, especially if they’ve been relying on mortgage interest deductions and capital allowances.

2. Shift Toward Long-Term Lettings  

  Some FHL landlords may decide to convert their properties into long-term rentals, especially in areas where there’s strong tenant demand but a shortage of properties.

Popular FHL Locations Likely to Be Affected

Tourism hotspots like Cornwall, the Lake District, North Wales, and coastal areas of Devon and Somerset have seen a boom in short-term rental properties, many of which qualify for the FHL tax regime. As the FHL regime ends, investors in these regions might find themselves needing to adjust their plans or reconsider whether to continue operating short-term lets.

For property investors in the UK, the abolition of the FHL tax regime is a major change, especially for those who have relied on the tax breaks to make holiday lets financially viable. Landlords need to be proactive in reviewing their portfolios, planning their next moves, and seeking professional advice ahead of the 2025 deadline.

The good news? While the tax benefits are ending, there are still opportunities in the property market—whether through long-term rentals or other investment strategies. Staying ahead of these changes will be key to maintaining profitability in an evolving landscape.

‍