FHL Regime Abolished from April 2025: What Landlords Need to Know

Lee Sharpe looks at how the tax regime for furnished holiday lettings will unwind over 2025. 

The government of the time announced that it would abolish the furnished holiday letting (FHL) regime (sometimes referred to as the furnished holiday accommodation (FHA) regime), with effect from April 2025 (i.e., 1 April 2025 for companies, and 6 April 2025 for income tax – individuals, partnerships, trusts, etc.) 

In truth, the government had been toying with abolishing the FHA regime entirely since as far back as 2009, when it was forced to accept that restricting the regime’s scope solely to UK properties was discriminatory under EU law. At the time, FA 2011 grudgingly widened the scope of FHA to include properties in the European Economic Area, but removed perhaps the most valuable tax income tax reliefs (flexibility for FHA losses). There appears to have been little substantive outcry since the 2024 announcement, so maybe the post-2011 regime was just not worth that effort. Even so, there are numerous consequences to the loss of FHA status, as now prescribed in FA 2025, s 25 and Sch 5. 

This article focuses on the main changes and their implications.  

Key changes 

The main aims of the 2025 legislation are to withdraw the remaining favourable tax treatments surrounding FHA status, while smoothing a path towards ‘ordinary property business’ status, either as part of the landlord’s pre-existing property business, or simply to comprise that ordinary or mainstream property business now in its own right, from April 2025 (and note HMRC largely intends to treat that business as continuing, just without the tax breaks): 

(NB. Companies with periods that straddle the 1 April 2025 transition will be treated for transition purposes as having two periods: one running up to 31 March 2025, and one running from 1 April 2025).  

Key effects 

(a) Mortgage interest relief – Going forward, landlords subject to income tax at higher rates will have to suffer the same restrictions on finance costs deducted against their former FHAs as for ordinary residential lettings (i.e., tax relief on finance costs limited to 20%). As many mainstream property business landlords will already know to their cost, the precise mechanism may well push formerly-FHA landlords into higher tax brackets, by initially disallowing finance costs in their entirety and then allowing a tax ‘credit’ (reduction) afterwards.  

(b) Profits split between spouses or civil partners – Another benefit of having FHA status was that co-owned FHA property in joint names between only spouses (or only civil partners) was not automatically split 50:50, but largely as those two spouses (or civil partners) decided. This quasi-partnership ‘protection’ (formerly at ITA 2007, s 836(3)) has now disappeared, so married couples, etc., will now need to be particularly mindful of their profit allocations for such joint property.  

(c) Losses – Losses from the formerly-FHA business will be ‘converted’ to corresponding ordinary property letting business losses from April 2025. Previously, FHA losses were streamed separately from any ‘ordinary’ property letting losses, but they are now aggregated into one amount (but UK losses remain separate from overseas losses). Where the FHA business was formerly running at a loss but the landlord’s mainstream letting business was making profits, this will be beneficial. Likewise, broadly, where the landlord had previously been making losses in their mainstream property business, while their FHA lettings are profitable, they will now be able to absorb those losses, going forward.  

(d) Fixed assets – Fresh capital expenditure on items in FHAs will no longer be potentially eligible for capital allowances. Any remaining ‘pool’ of expenditure already in the capital allowances regime by April 2025 will be treated as the pool (or part of the pre-existing pool) of the corresponding mainstream property business going forward, so eligible to be written down until that mainstream property itself ceases, or a small pool allowance is claimed for pools standing at £1,000 or less (CAA 2001, s 56A).  

The fact that the assets that gave rise to that residual expenditure may now be in an ‘ordinary’ let dwelling does not trigger a balancing adjustment (but if a third party buys that property, they will not be able to access your capital allowances like they could previously). The fresh or future expenditure on replacing those fixed assets will, in many cases, potentially rank for replacement of domestic items relief, where free-standing, or even as simple ‘repairs’ to the overall fabric of the residential property, where fixed to the building (fixtures, etc.).  

(e) Pensions and relevant earnings – FHA profits used to count as ‘relevant earnings’, thence to support an individual’s making qualifying personal pension contributions (or at least where they wanted to make contributions exceeding £3,600 in a tax year); but from April 2025, individuals will need to rely on trading profits, or employment earnings. 

(f) CGT reliefs – Properties within the FHA regime used to enjoy special ‘quasi-trading asset status’ for the purposes of: 

• gift relief (business assets); 

• rollover relief; 

• business asset disposal relief (formerly entrepreneurs’ relief); 

• irrecoverable loans to traders (i.e., to FHAs); or 

• substantial shareholdings exemption (companies). 

FHAs will no longer be able to shelter fresh gains going forward, but April 2025 will not itself trigger forfeiture of relief for gains already sheltered, so long as the properties in question continued to qualify as FHA up to the April 2025 transition. In fact, a 2024/25 gain could still be ‘rolled over’ into an FHA property acquired even up to 1 or 5 April 2025, and a claim could yet be made afterwards, for a property acquired up to that date (the anti-forestalling regime is largely aimed at scenarios where the completion of a property transaction has been deferred, for tax reasons, beyond April 2025).  

In a similar vein, where the FHA business has actually ceased before 6 April 2025, a business asset disposal relief claim for CGT purposes can be made for otherwise-qualifying disposals within the usual subsequent three-year window. 

What does not change?  

(a) VAT – Short-term ‘holiday-type’ occupation will remain exposed as a VAT-able supply, unlike mainstream long-term letting. 

(b) IHT and business property relief (BPR) – FHA status was only potentially indicative of a claim to BPR status, that ultimately depended on the extent of (broadly) ‘non-rental activity’ such as a concierge, laundry, meals, excursions, etc., and this remains the case.  

Beware the traps 

Those formerly FHA landlords with mortgage interest costs but who assume that they will not be adversely affected (“I am only a basic-rate taxpayer, so I should be OK”) should be careful they are not caught out by the way the finance costs regime works in the detail – such as where their personal incomes are already skirting the 40% income tax threshold (£50,270 for 2025/26). This is not the only income trap; adjusted incomes around the band where the personal allowance is forfeit (£100,000 - £125,140) could see some harsh marginal rate effects; exposure to child benefit clawback is another. 

Profit share and joint ownership between married couples or civil partners 

HMRC (and most commentators) say all properties owned jointly between a married couple (or civil partnership) must have their profits split 50:50, from April 2025, pending a Form 17 joint notice to HMRC, only then applying the (non-50:50) split of beneficial ownership.  

To my understanding, the Form 17 is, strictly, required only for property held ‘in joint names’, meaning ‘in joint legal ownership’ (such as per HM Land Register).  

While not a trap of losing FHL status itself, beware trying to ‘fix’ profit splits by changing the split in beneficial ownership; gifts other than between spouses, and civil partners, (living as a couple), generally trigger CGT; also, changing the beneficial ownership of a property subject to a mortgage can trigger stamp duty land tax, (or its devolved equivalent), even between married couples, etc. 

Conclusion 

Many landlords do not have FHAs, so they will not be affected by losing FHA status, and the transition seems fairly genteel. But each FHA landlord will need to consider their specific circumstances as there are several fine points: notably orienting around profit share, and matters like the cash basis, child benefit, and even MTD. Better to model outcomes guided by a suitable adviser, sooner rather than later. Some FHA landlords may feel that they are actually operating in partnership, rather than as ‘mere’ co-owners – maybe trading, even. The implications are far-reaching and should be considered carefully.