Introduction

The Furnished Holiday Lettings (FHL) tax regime is set to be abolished from 6 April 2025 for individuals and 1 April 2025 for companies. This change, announced in the Autumn Budget 2024, marks a significant shift for property owners who have benefited from preferential tax treatment under the current FHL rules.

From that date, FHLs will be taxed under standard property business rules, leading to higher tax burdens and the removal of key benefits such as Business Asset Disposal Relief (BADR), full mortgage interest relief, and capital allowances.

This article outlines the key tax changes, opportunities for strategic planning, and why acting before 5 April 2025 is crucial for landlords looking to minimise tax liabilities.

1. What is Changing?

From April 2025, the FHL tax regime will be abolished, meaning:

🔹 No more capital gains tax reliefs — BADR, Rollover Relief, and Gift Relief will no longer apply to FHLs​.
🔹 Mortgage interest relief will be restricted — Interest on loans for FHLs will only qualify for basic rate relief at 20%, rather than full relief​.
🔹 Capital allowances removed — No more deductions for the cost of furniture, white goods, or integral features. Instead, landlords can only claim Replacement of Domestic Items Relief, which is less generous​.
🔹 FHLs lose their “business” status — Profits will no longer count as relevant earnings for pension contributions, reducing pension tax advantages​.
🔹 Income splitting between spouses/civil partners changes — From April 2025, jointly owned rental income will default to a 50:50 split, unless a Form 17 election is made​.

Examples of How These Changes Impact Landlords

📌 Capital Gains Tax Relief Example: Under current rules, FHLs qualify for BADR at 10% when sold. For example, if a landlord sells a qualifying FHL property with a £200,000 gain, the CGT payable would be £20,000. After April 2025, BADR will increase to 14%, meaning the same sale will result in a £28,000 CGT liability, and after April 2026, the CGT rises to 18% (£36,000)​.

📌 Mortgage Interest Relief Example: Suppose a landlord has a £500,000 mortgage on an FHL property, with £25,000 in annual interest payments. Currently, if the landlord is a 40% taxpayer, they can deduct the full £25,000, reducing their tax bill by £10,000. After April 2025, only basic rate relief (20%) will apply, reducing the tax saving to £5,000 — a £5,000 loss in tax relief each year​.

📌 Capital Allowances Example: Under current legislation, an FHL owner installing a new kitchen costing £20,000 can claim full capital allowances, reducing their taxable profits significantly. After April 2025, the Replacement of Domestic Items Relief will only apply to replacements, not new purchases, meaning no immediate tax relief is available for first-time installations​.

📌 Pension Contribution Example: If a landlord earns £50,000 from FHLs, this currently counts as relevant earnings for pension contributions, allowing them to max out pension contributions with tax relief. From April 2025, this income no longer qualifies, meaning pension contributions will be restricted, reducing tax efficiency​.

2. Business Asset Disposal Relief (BADR) and the Three-Year Rule

BADR allows landlords to pay a lower CGT rate on sales of FHLs. However, from April 2025, BADR will only apply if the FHL business has ceased before this date.

Key CGT Rate Changes

🚨 The current CGT rate under BADR is 10%, but will increase to 14% from 6 April 2025 and 18% from 6 April 2026​.

To qualify for the lower 10% rate, landlords must cease their FHL business before 5 April 2025 and sell within three years.

Practical Scenarios for BADR Planning

📌 Landlord Looking to Sell in 2026–2027: Emma owns an FHL in Cornwall and plans to retire in 2026. By stopping all lettings before 5 April 2025, she secures BADR at 10% if she sells before April 2028. If she continues letting, she loses BADR and faces a 24% CGT rate, costing her thousands​.

📌 Landlord Selling in 2024–2025: John and Sarah own an FHL in Devon with a £250,000 gain. If they sell before April 2025, they qualify for BADR at 10% (£25,000 CGT). If they wait until 2026, they pay 18% (£45,000 CGT)​.

📌 Landlord Gifting to Family: Mark plans to gift his FHL to his son. If he does so before April 2025, he can claim Gift Relief and defer CGT. After April 2025, Gift Relief is abolished, triggering immediate CGT on transfer​.

3. The Importance of Form 17 for Spousal Income Splitting

What is Form 17?

Currently, FHL owners can split rental income in any proportion, which is advantageous for tax planning. From April 2025, unless a Form 17 election is filed, jointly owned rental income will default to a 50:50 split​.

Example of Form 17 Impact

📌 Without Form 17: Alex owns an FHL but wants to allocate 5% of ownership to his spouse. If no Form 17 is filed, rental income is split 50:50 by default, which could result in higher tax bills if one spouse is a higher-rate taxpayer.

📌 With Form 17: If Alex submits Form 17 and a declaration of trust, HMRC will recognise the 5%/95% split, ensuring tax efficiency​.

🚨 Mortgage & Stamp Duty Warning: If Alex transfers 5% ownership to his spouse but the property has a mortgage, this may trigger Stamp Duty Land Tax (SDLT) if the spouse assumes a portion of the debt. Legal advice is essential before restructuring ownership​.

4. Final Thoughts: What Should Landlords Do Now?

📌 Review Your FHL Portfolio — Determine whether selling, restructuring, or gifting makes sense.
📌 Cease FHL Business Before April 2025 — To qualify for BADR at 10% and gain a three-year sale window.
📌 File Form 17 Before April 2025 — To retain flexibility in income splitting.
📌 Accelerate Capital Expenditure — Maximise deductions before allowances are removed.
📌 Consider Mortgage Refinancing — Interest relief will be restricted from April 2025.
📌 Maximise Pension Contributions — FHL profits will no longer count as relevant earnings.

📢 For further advice, contact us at TS.Tax before the April 2025 deadline.