Tax rules for furnished holiday lets and what’s changing

Letting is letting right? Nope! How you let a property can completely change your tax rules and furnished holiday lets have completely different rules to most properties. 

Buckle up for a tour of the current rules and tax calculations for furnished holiday lets, as well as the major changes that will be introduced in April 2025 with the abolition of the furnished holiday let status. 

What is a furnished holiday let?

A furnished holiday let (FHL) is a property that’s rented out on a series of short-term rather than long-term lets. This affects the tax relief that the landlord can claim. To qualify as a furnished holiday let, the property must meet all of the following criteria:

• located within the UK or European Economic Area (EEA)
• commercially let with a view to make a profit
• equipped with sufficient furniture that guests are allowed to use

FHLs must also fulfil what are known as ‘occupancy conditions’: the property has to actually be let, and have guests staying there, for a certain number of days. The occupancy conditions must be checked for each tax year (6th April to the following 5th April) and show that the property met all of the following criteria:

• available to let for at least 210 days that year
• actually let commercially at least 105 days that year (for the rest of the year, it can be let at ‘mates’ rates’ or be empty)
• let on a short-term basis with no more than 155 days total being stays longer than 31 days in a row

A property let through Airbnb, for example, would only be considered an FHL if it met these criteria. You will need to track the number of nights it was actually let commercially during the year - which could mean that it counts as an FHL one year, but doesn’t count the next. If a property doesn’t qualify in one year because you weren’t able to meet one of the criteria, you may be able to make a ‘period of grace’ election to allow you to treat it as qualifying as an FHL for that year.

If you let multiple FHLs and one or more of these is not successfully let for 105 days of the year, you can opt to use the average number of occupied days across all your FHLs. 

For example, if you let two FHLs and one has been commercially let for 100 days but the other has been commercially let for 200 days, you could take the average of the two (150 days). This would qualify both properties as FHLs for the year. 

What tax do you need to pay on a furnished holiday let?

The considerations when calculating tax for your FHLs will be different from other properties you may rent out. 

Income Tax

You still have to pay Income Tax on your rental income from letting out FHLs. However, the rules for the expenses and allowances you can claim may be more generous.

Capital Gains Tax 

A furnished holiday let is still considered a residential property asset. When you come to sell an FHL, you may be required to pay Capital Gains Tax if the property is owned by you and is not your main residence. However, as any income from an FHL is treated similarly to trading income, you may be eligible for certain Capital Gains reliefs for traders. 

For example, Business Asset Rollover Relief can allow you to defer the payment of Capital Gains Tax as long as a portion of the proceeds from selling the asset (in this case, an FHL property) is used to buy new assets. You won’t need to pay any tax on the initial sale until you sell the new asset. At this point, you may need to pay tax on all or part of the gain from the initial asset. 

If you’re selling your FHL and not planning to purchase any other business assets, Business Asset Disposal Relief (BADR) may reduce your tax bill. To qualify, you must have owned the FHL for two years before the date of sale. If you qualify, you’ll pay 10% Capital Gains Tax instead of the usual rates of 18-24%. 

In the Autumn Budget, the government announced that the rate of Capital Gains Tax that applies to BADR will be increasing from 10% to 14% on 6th April 2025 and from 14% to 18% on 6th April 2026.

For more information on Capital Gains Tax, take a look at our guide to CGT for landlords. 

Council Tax or business rates?

This can be a slightly tricky question, as the answer will change depending on where your FHL is and how many days per year it is available to let and is actually let. 

If your FHL is in England, Scotland or Northern Ireland, then it is likely to meet the requirements for business rates and will not be charged Council Tax. To qualify to pay business rates, the property must be self-catered, available for short-term let for at least 140 days per year, and actually be let for 70 days per year. 

If your FHL is in Wales, the threshold to qualify for business rates is higher. The property must be self-catered, available for short-term let for at least 252 days per year, and actually be let for 182 days per year. If your FHL is below this threshold, then you’ll need to check its local authority’s website to see whether you need to pay a premium for second home Council Tax. 

If you do have to pay business rates, don’t worry! You may be able to claim small business rate relief. If the rateable value of your property is less than £15,000, you will pay a reduced rate and, if it’s £12,000 or less, you’ll get 100% relief and pay no business rates. You can use HMRC’s tool to find the rateable value of a property in England or Wales.

Pension

Most buy-to-let income isn’t considered pensionable earnings, meaning that any pension payments you make from those earnings won’t qualify you for any tax relief. FHLs are the exception. 

If you pay into a personal or workplace pension from your FHL income and report this on your tax return, you should receive tax relief on this. 

What allowable expenses can you claim for a furnished holiday let?

If you rent out FHLs, you may have additional allowable expenses to claim that landlords renting out non-FHL properties may not be eligible for.

Some expenses only allowable for FHL landlords include:

• heating and electricity bills (these would normally be paid by tenants of non-FHLs and are therefore not allowable for the landlord)
• full finance costs (only FHL landlords can claim full finance costs e.g. arrangement fees on the purchase loan, bank fees for a separate FHL business bank account, interest paid on a repayment mortgage) 
• cleaning (cleaning would normally be paid by tenants of non-FHLs)
• guest supplies (e.g. toiletries, washing up liquid, bin bags)
• computer and phone costs (if these are used fully or partially for running an FHL, some proportion of them may be allowable)
• Council Tax (if your FHL doesn’t qualify for business rates)

Some expenses allowable for all landlords include:

• repairs and maintenance costs (allowable as long as the repair would not provide a capital improvement)
• letting agency fees, insurance and advertising
• travel costs including mileage (only allowable on visits to the property for business/maintenance purposes)
• some finance costs (though there are restrictions for landlords of non-FHLs on how much they can claim)

Any expenses must be for commercial use. That means if you, or someone you know, uses the property without paying, you won’t be able to claim tax relief on the expenses incurred on this private use. The easiest way to calculate this is to work out the percentage of commercial use and claim for that percentage of the total expenses. 

Capital allowances

Unlike landlords of other residential property and long-term lets, landlords of FHLs can claim capital allowances for items like furniture, equipment and fixtures used in the FHL. 

You may be able to do one of the following:

• record a percentage of the asset cost against your taxable income for that property over a number of years
• offset the full cost in the year you buy the asset if it is eligible for the Annual Investment Allowance 

Losses

If you own multiple FHLs in the UK and you make a loss on renting out one of them, you may be able to offset the loss against any profit you make on another UK FHL you run. However, you won’t be able to offset profit on a different type of rental property i.e. a long-term let against losses made by renting out FHLs, or vice versa. If you own different types of lets, you need to calculate profit and loss separately for your FHLs and for longer-term lets when you are filling in your tax return. If you have some FHLs in the UK and others in the EEA, you can only set losses made by one FHL against the other FHLs in that geographical location (UK or EEA).

What’s changing for furnished holiday lets in 2025?

The furnished holiday letting regime will be ending in April 2025. The government announced in their Spring Budget that, starting with the 2025/26 tax year, FHLs will be treated the same as long-term lets. 

From April 2025, if you rent out an FHL:

• you won’t be eligible for any Capital Gains Tax relief
• you won’t be able to claim capital allowances for items like furniture or white goods
• you won’t receive tax relief on any rental income you pay into a pension scheme

FreeAgent for Landlords

If you’re an unincorporated landlord hoping for a better way to stay on top of your tax responsibilities, why not take a look at FreeAgent for Landlords? 

Try FreeAgent for Landlords for 30 days free and make your property finances easier than ever.

Originally published 15 May 2024
Last updated 30 October 2024