The UK holiday let market has seen rapid growth in recent years, largely fuelled by the rise in staycations and favourable tax incentives. However, from April 2025, significant tax changes will impact Furnished Holiday Let (FHL) properties, fundamentally altering the financial landscape for landlords. These changes bring both challenges and opportunities, with mortgage intermediaries playing a key role in helping clients navigate this transition successfully.
TAX CHANGES
From 6th April 2025 (1st April for companies), income from FHLs will be taxed under the same rules as standard rental properties. The most notable changes include restrictions on mortgage interest relief, meaning landlords will only be able to offset interest costs at the basic rate of Income Tax. Additionally, capital allowances will be abolished, removing the ability to deduct refurbishment and furnishing costs from taxable profits.
Other changes include the removal of key Capital Gains Tax (CGT) reliefs, such as Business Asset Disposal Relief, Rollover Relief, and Gift/Holdover Relief, making it less tax-efficient to sell an FHL property. Furthermore, FHL income will no longer count as relevant earnings for pension contributions, impacting tax-efficient retirement planning for landlords who have relied on this scheme.
These legislative changes will affect individual landlords, trusts, and companies currently benefitting from the FHL tax regime. Meaning landlords should be reviewing their investment structures to mitigate any potential financial risks.
WHAT THIS MEANS FOR LANDLORDS
The removal of capital allowances and mortgage interest relief will increase taxable income for many landlords, particularly those with highly leveraged properties. The impact will vary depending on tax status.
For basic-rate taxpayers, the effect may be minimal due to compensating tax credits. However, higher-rate taxpayers could see a substantial increase in their taxable income, leading to higher tax liabilities. In contrast, limited company landlords will remain unaffected by finance cost restrictions, making company ownership a more attractive option for many investors.
CONSIDERING LIMITED COMPANY OWNERSHIP
With individual landlords facing higher tax burdens, many landlords are looking to transfer their FHL properties into a limited company. This structure offers several benefits, including lower corporation tax rates (25%) compared to personal tax rates of up to 45%, as well as the ability to fully deduct mortgage interest from rental income. Additionally, company ownership can provide asset protection and facilitate long-term estate planning.
However, transferring a property to a company is not without costs. The process may trigger Capital Gains Tax and Stamp Duty Land Tax liabilities, especially if the property has appreciated in value. Brokers should therefore encourage clients to seek tax advice before making structural changes to their portfolios.
THE BOTTOM LINE
The removal of FHL tax benefits marks a significant shift in the holiday let sector. While the changes present financial challenges, they also create opportunities for brokers to offer tailored advice, helping landlords transition to more tax-efficient structures, explore remortgaging options, and work with specialist lenders who understand the nuances of holiday let finance.
Those who act early will be best positioned to mitigate risks and continue maximising returns from their holiday let investments. With the right planning, landlords can adapt, and brokers can be the trusted advisers they need. Now is the time to take action.
