As we noted briefly in our autumn edition of Law & Land, one of the final actions of the last government was to abolish the tax advantages for furnished holiday lettings (FHL) to bring them into line with other rental properties. Labour has pressed on with these new measures which came into effect in April 2025.
The new rules apply to all FHLs and are designed to encourage more long-term lets to help counter the shortage of suitable rental properties. Even those holiday lets that would not be suitable for long term rent, such as many of those on farms, will still be caught by the new rules.
What are the changes?
Interest payments: tax relief on the interest on any mortgage or other loan taken out against the property will be restricted to the basic rate of tax i.e. 20%, rather than the owner’s marginal rate of tax.
Pensions: income from FHLs no longer counts as relevant earnings for pension payments.
Capital allowance rules: owners of FHLs will not be able to claim capital allowances against expenditure on plant and machinery used in the FHL. Any relief on fixtures and fittings will be restricted to ‘replacement of domestic items relief.’
CGT reliefs: the capital gain from selling a FHL cannot be rolled over into other qualifying assets (such as a new holiday cottage) and they no longer qualify for Business Asset Disposal (BADR) relief (unless the dwelling ceased to be a holiday let before the 1 April deadline in which case it may qualify for BADR). Holdover relief is also abolished so any gifting of a FHL to the next generation will be accompanied by a CGT bill.
What you need to do now
Although farmers with holiday lets will see a larger tax take, there is some merit in having a more simplified, streamlined financial administration as the accounting rules will be similar to those for other property lettings. Additionally, any losses incurred can be offset against profits from any other property income. However, we strongly recommend taking professional advice on how to mitigate the financial effects of the changes.
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