A Furnished Holiday Let (FHL) is a property that must meet strict HMRC rules for beneficial tax treatment.
Ownership of a holiday home can have many benefits, both personal and financial.
When let out it provides an income which exceeds what would be possible from an equivalent buy to let. There’s the opportunity for you to enjoy holidays there while the letting income pays for the running and upkeep.
To benefit from the available tax advantages the rental property needs to qualify as a Furnished Holiday Let (FHL), as defined by HMRC.
Here we look at the basic points needed to meet this criteria.
Abolition of FHL status
The UK government has announced plans to abolish the beneficial tax treatment for Furnished Holiday Lettings (FHLs) from April 2025. This means that FHL owners will no longer be able to claim a number of tax reliefs, including:
- Mortgage interest relief: Currently, FHL owners can claim 100% of the mortgage interest as an expense. From April 2025, this will be reduced to 20%, bringing FHLs into line with the rules for buy-to-let properties.
- Business asset disposal relief (BADR): This relief allows FHL owners to pay a lower rate of capital gains tax when they sell their property. From April 2025, BADR will no longer be available for FHLs.
- Gift holdover relief: This relief allows FHL owners to pass on their property to their children or grandchildren without incurring a capital gains tax charge. From April 2025, gift holdover relief will no longer be available for FHLs.
These changes will have a significant impact on the profitability of FHLs. Higher rate taxpayers, in particular, will be hit hard by the loss of mortgage interest relief.
It is important to note that the changes have not yet been implemented, and there is still time for the government to change its mind. However, FHL owners should be aware of the potential changes and start to plan for the future.
Further reading:
Property location
Your holiday let property needs to be located in the UK or European Economic Area (EEA). There’s no specific HMRC conditions on the type or style of property.
Making a profit £££
The property must be let out to paying guests with the aim of making a profit. It is the intent that is most important here rather than the actual outcome.
However, we are sure that you do wish to receive a good income from your holiday let to support it’s upkeep and the mortgage payments. Having a letting agent onboard can help here with proof that the property has been correctly marketed and promoted as available.
Fully Furnished
Your holiday home will need to be fully furnished to a good standard and ready to accept guests. There are no specifics explaining how much of the furnishings or type you need to qualify as Furnished Holiday Let (FHL). You will be expected to provide all items and facilities that a guest expects to have for a stay in a serviced accommodation property.
Some of these capital costs will be an allowable expense so keep the receipts and check with your tax adviser.
Availability and occupancy
Here we get into some of the finer detail.
For an existing FHL these rules apply for the tax year. For a new FHL they apply to the first 12 months from when the letting began.
Availability – The property must be available for letting as a furnished holiday let accommodation for at least 210 days in the year. (Ignore days when you are staying at the property)
Letting – You must actually let the property to paying guests for at least 105 days in the year out of the 210 days it was available.
Duration – Generally speaking only lets of 31 days continuous duration or less qualify. If lets of more than 31 days do occur there should not be more than 155 days of this type of longer term occupation each year.
Averaging election
This is only applicable if you own more than one qualifying furnished holiday let property.
If on occasion one of your lets does not meet the letting condition of 105 days then you can elect to apply some averaging across your holiday let portfolio for that tax year. This should only happen after discussions with your tax adviser.
Council tax
Don’t let this one catch you out!
If your property is in England and available to let for short periods that total 140 days or more per year, it will be rated as a self-catering property and valued for business rates instead of council tax.
If your property is in Wales it will be rated as a self-catering property and valued for business rates if it’s both:
- available to let for short periods that total 140 days or more per year
- actually let for 70 days
There are different rules in Scotland.
Tax benefits
These are arguably the main reasons why you would want a qualifying furnished holiday let.
- You can fully offset any holiday let mortgage interest costs against the rental income, reducing personal income tax
- You can claim Capital Gains Tax reliefs such as Business Asset Rollover Relief, Entrepreneurs Relief
- You can claim capital allowances for items such as furniture, equipment and fixtures
- Any profits from the FHL can be counted as earnings for pension contributions
PLEASE REMEMBER
This information does not constitute advice or recommendation. Please speak with your professional advisers before taking any action. The information is believed to be correct at the time of publishing.