Changes to Tax Relief for Furnished Holiday Lettings from April 2025

Introduction:

Landlords who rent out furnished holiday accommodation have, until now, been able to take full advantage of various tax benefits, particularly regarding the deduction of interest and finance costs when calculating taxable profits. However, starting from 5 April 2025, this favourable tax treatment will end. After this date, landlords will face the same tax rules as those applicable to other residential properties.

Key Changes in Tax Rules:

Currently, landlords of furnished holiday accommodation can fully deduct interest and finance costs from their rental profits. But from 6 April 2025, unincorporated landlords will face significant changes. Instead of a full deduction, the relief will be granted as a tax deduction at the basic rate of 20%, which will be applied to the lowest of the following:

• Interest and finance costs
• Profits from the property business
• Adjusted total income (after losses and reliefs, but excluding savings and dividend income that exceed the landlord’s allowance)

What This Means for Landlords:

The most important shift is that the profits from furnished holiday lettings will no longer be calculated separately from other residential lettings. The relief for interest and finance costs will now apply to all residential lets as a whole, not just to the holiday lets specifically. Additionally, the classification of “furnished holiday let” will be abolished, and properties let to holidaymakers will simply be treated as residential lets. This means landlords will no longer need to meet specific conditions, such as availability or letting criteria, to qualify for the holiday let tax regime.

If, for any reason, a landlord’s interest and finance costs exceed their rental profits or adjusted income in a given year, the excess amount can be carried forward and relieved in future tax years, as long as their income and profits allow.

Impact on Landlords:

The key impact will be felt by landlords who have mortgages on their furnished holiday lets. Currently, they benefit from tax relief at their marginal tax rate when deducting interest and finance costs. After the change, however, the relief will be given at a fixed 20% rate, regardless of whether the landlord is in a higher tax bracket. This change effectively raises the cost of borrowings for those paying tax at the higher or additional rate, as they will no longer receive relief at the full rate of tax they are liable to pay.

Conclusion:

These changes will primarily affect unincorporated landlords of furnished holiday accommodation, with the move to a basic rate tax deduction representing a notable shift. Landlords will need to plan ahead to manage the potential increase in borrowing costs starting in April 2025.

For more information, refer to ITTOIA 2005, sections 272A and 272B; Finance Bill 2024–25, clause 25 and Schedule 5.