As confirmed in the Autumn Budget 2024 and included in the Finance Bill 2024-25, the special tax rules for furnished holiday lettings (FHLs) have been abolished from 6 April 2025 for income tax and capital gains tax (CGT). FHL tax rules ended for corporation tax purposes on 1 April 2025.
This change impacts individuals, corporates and trusts who operate or sell FHL accommodation and removes the specific tax treatment and reporting requirements for FHLs.
The main tax rules changes include:
- FHL income and gains will now be treated as part of a general UK or overseas property business,
- Finance cost restriction rules will apply – loan interest will be restricted and no longer fully deductible for FHLs,
- There will be no further capital allowance claims (instead landlords may be able to claim ‘replacement of domestic items’ relief),
- Gains on the disposal of FHLs will no longer qualify for Business Asset Disposal Relief (BADR), and
- FHL income will no longer be included within relevant UK earnings for pension contribution purposes.
The abolishment of the FHL tax rules doesn’t include any changes in VAT treatment. The provision of holiday income is subject to VAT and remains relevant when determining whether VAT registration threshold limits have been breached. If there is a change of use of the asset to longer term commercial or residential letting, this could result in a change in VAT treatment and advice should be sought.
Accounting changes
In addition to the changes in tax rules, there may be noticeable changes seen in an entity’s financial statements and underlying accounting records. Whilst the abolition of the FHL regime primarily affects tax treatment, companies should reassess the use of the former FHL accommodation to determine the correct classification within their financial statements.
Corporate entities
For corporate entities, rental income from former FHL accommodation should be included within other operating income unless the principal activity of the company is property letting, then rental income should be disclosed as turnover.
Where the property is held to earn rental income or for capital appreciation it should be classified as investment property and depreciation would not be charged, instead the property is assessed regularly for changes in market value. In contrast if the property is used for short-term commercial lettings and is actively managed, it could qualify as property, plant and equipment and depreciation charged accordingly.
Unincorporated entities
For unincorporated entities and trusts, it may no longer be beneficial to present income and expenditure separately for FHLs and any income or expenditure should be treated in line with other residential properties.
Accounting software
The change in tax and accounting treatment provides an opportunity to review underlying accounting records and perform a health check, is the structure of your chart of accounts and enterprise systems still appropriate?
A separate enterprise within the chart of accounts may no longer be required for FHLs. Instead, it may be more appropriate to pool the income with other rental receipts, rather than a separate income stream or enterprise solely for FHLs. Expense categories should also be reviewed, for example FHL expenditure could be allocated with other property expenditure (such as repairs and maintenance) and any capital allowances nominal codes could become replacement of domestic items (where this relief may apply).
If your accounting software integrates with tax modules, then tax settings should be updated to disable any FHL specific tax treatments (eg capital allowances) and enable standard property income rules (eg finance cost restriction). FHL properties now form part of an individual’s UK or overseas property business and as such brought forward FHL losses can now be offset against the future profits of either a UK or overseas property business. Any loss tracking within software should also therefore be updated so that FHL losses carried forward are now pooled with general property business losses.
How we can help
Where FHL assets were being depreciated, a review of depreciation settings should be taken to ensure that it is still appropriate to charge depreciation, this will depend on the categorisation of the property within the financial statements.
Erica White, Director and a member of our Land and Rural Practice Group, comments:
“The abolition of the FHL regime marks more than just a tax shift – it’s a pivotal moment for businesses to realign their financial reporting, reclassify assets, and modernise accounting systems.
“Businesses should be reviewing these internal issues and seek professional advice where needed in order to take appropriate action.”
For help with any of the issues raised here, please get in touch.
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